cosmetic retailer sector 28 apr 2011 c ching

CONSUMER DISCRETIONARY | Overweight

Please read the analyst certification and other important disclosures on last page

Hong Kong Cosmetics Retailers 28 April 2011

Beauty never sleeps

Hong Kong’s cosmetics retail market is flourishing. The

city is a favourite destination for mainland shoppers and

will continue to be so as the renminbi appreciates and the

government expands the scope of the visa scheme.

Meanwhile, domestic consumption is about to take off

thanks to a thriving local economy and government cash

payouts. Bonjour (653 HK, Outperform) and Sa Sa

(178 HK, Outperform), enjoying both brand recognition

and dominant market positioning, stand to benefit from

prevailing trends. Valuations remain attractive, with

23-25% EPS CAGR for CY10-13F and over 4% dividend

yield. We initiate coverage on both retailers with an

Outperform rating.

Analysts

Claudia Ching (852) 2532 2528 [email protected] Forrest Chan, CFA (852) 2532 6743 [email protected] Timon Tai (852) 2532 2574 [email protected] Timothy Sun (852) 2532 6746 [email protected]


2

Table of Contents

Beauty never sleeps .................................................................................................................................3

Investment summary ................................................................................................................................4

Far from saturated....................................................................................................................................7

Buoyant outlook for domestic consumption ............................................................................................12

Dominant players continue to lead..........................................................................................................14

Key industry risks ...................................................................................................................................17

SWOT analysis.......................................................................................................................................18

Bonjour Holdings (653 HK) .....................................................................................................................19

Sa Sa International (178 HK)..................................................................................................................37


3

Hong Kong Cosmetics Retailers

Beauty never sleeps Sector Rating:

Overweight (maintained)

� We initiate coverage on the Hong Kong cosmetics retail

sector with Outperform company ratings on its two

dominant players: Bonjour (653 HK) and Sa Sa

International (178 HK), popular brands among both local

and mainland consumers.

� Hong Kong is well positioned to keep its title as the “top

shopping destination for cosmetics products”, given the

city’s diversified and comprehensive product offerings,

relatively cheap prices, quality assurance and the

availability of parallel trade cosmetics.

� The contribution from mainland tourists will only grow

stronger on the back of continued renminbi appreciation

and the widening scope of the visa scheme. Greater

numbers of mainland tourists with more and more to spend

will underpin Bonjour and Sa Sa’s sales growth.

� We view concerns over the potential change in China’s

import tax as misplaced and we are confident Hong Kong

will remain a preferred cosmetics shopping destination for

mainlanders.

� Local shopping sentiment is improving. The domestic

economy is strong and we anticipate the proposed

government cash payout will stimulate local consumer

discretionary spending, putting Hong Kong retailers on track

for growth.

� Rent hikes have, by and large, been mitigated by robust

same-store sales growth and constant gross margin

expansion achieved through the contribution of additional

private labels and exclusive brands, two areas Bonjour and

Sa Sa have been focusing on.

� Both companies are committed to allocating greater

resources to developing their mainland businesses, which

we believe have considerable long-term potential.

� Earnings visibility is high for both retailers on the back of

sustainable sales and margin enhancement. Valuations

remain reasonable, offering attractive dividend yields and

over 23% earnings CAGR for CY10-13F. In our view, most

market concerns have been priced in and we see long-term

investment opportunities for the industry leaders.

Valuations summary

Bonjour (653 HK) Sa Sa (178 HK)

Rating Outperform Outperform

Share price (HK$)* 1.35 4.61

Target price (HK$) 1.60 5.45

Upside/downside (%) 24.1 22.9

Market cap (US$m) 517 1,727

EPS growth – CY11 (%) 23 26

EPS growth – CY12 (%) 22 23

PE – CY11 (x) 16.8 23.3

PE – CY12 (x) 13.7 18.9

Yield – CY11 (%) 4.7 4.3

* Share prices as at close on 28 April 2011

Source: Bloomberg, CCBIS estimates

Claudia Ching (852) 2532 2528 [email protected]

Forrest Chan, CFA (852) 2532 6743 [email protected] Timon Tai (852) 2532 2574 [email protected] Timothy Sun (852) 2532 6746 [email protected]


4

Investment summary

We initiate coverage on the Hong Kong cosmetics sector with Outperform ratings on

the two leading cosmetics chain operators in Hong Kong: Bonjour (653 HK,

Outperform) and Sa Sa International (178 HK, Outperform). Bonjour and Sa Sa are

both sprawling one-stop shops carrying a long list of high-profile international brands

and niche domestic beauty products. The two chain operators own more than half the

total market share in Hong Kong and enjoy strong brand recognition and popularity

among local and mainland consumers. In our view, the two companies are good

tourist plays, well placed to capture rising mainland spending on cosmetics goods.

Our bullish view rests on Hong Kong’s healthy industry growth outlook. Hong Kong is

considered the “heaven of cosmetics” in Asia, on the strength of its diversified mix of

international and domestic brands offered at a wide range of prices. This combination

of popular brands at competitive prices has, over the years, appealed to mainland

customers who have shown a strong preference for shopping in Hong Kong. Product

authenticity and quality control tend to be better in Hong Kong compared with

mainland China, providing more reasons for mainland customers to engage in

cross-border shopping sprees. The availability of products through parallel trade

(more on this later), a practice banned in China, offers yet another attraction to

mainland shoppers. Most importantly, Hong Kong’s duty-free status ensures that

skincare products and cosmetics remain competitively priced and are popular

purchases for visitors.

We believe the contribution from mainland customers will only strengthen over time,

boding well for Hong Kong cosmetics players. The influx of mainland travelers is

expected to remain high due to the widening scope of the travel scheme. Hong Kong

cosmetics retailers will also benefit as the renminbi continues to appreciate. A

stronger renminbi translates to greater purchasing power for mainland tourists. It also

means more Hong Kong consumers will be inclined to shop in town.

We believe rising rents can be mitigated by steady same-store sales growth (SSSG)

and gross margin improvement through cost controls and the shift in sales mix

towards higher-margin in-house brands and/or exclusive distribution products.

Industry leaders, Bonjour and Sa Sa, will enjoy margin improvement as a result of

these trends.

Besides purchases by mainland customers, Hong Kong is benefitting from improving

shopping sentiment at the local level, with local Hong Kong consumers exhibiting a

greater propensity to spend. The local retail market remains strong, supported by low

unemployment, steady wage growth and the wealth effect. Local consumer sentiment

will also receive a boost from the government’s HK$6,000 cash payout. Both Bonjour

and Sa Sa are committed to allocating more resources to developing their mainland

businesses, which we believe have considerable long-term potential.

In our opinion, most market concerns have been priced in, in particular the potential

that the Chinese mainland import tax will be relaxed, a fear we believe is misplaced.

Earnings visibility remains high for Bonjour and Sa Sa and both are beginning to show

highly attractive valuations. Trading at 14-19x CY12F PE, valuations remain

reasonable. Having yields in the range of 4% to 7% in CY11-13F, both counters are

promising investment picks to capture sustainable development within Hong Kong’s

cosmetics sector.


5

Valuations summary (continued)

Stock Share price Market cap 3M average value traded EPS growth (%)# PE (x) PE/G (x) Yield (%) P/B ROAE Net cash/share Net gearing

Company Code (local currency) (US$m) (US$m) CY11 CY12 CY11 CY12 CY11 CY11 CY11 CY11 (%) (%)

HK retailers

Lifestyle 1212 HK 21.35 4,604 5 7 15 23.7 20.7 3.2 1.7 4.4 19.5 3 Net cash

Luk Fook 590 HK 28.75 2,002 8 26 5 16.9 16.0 0.6 2.4 4.3 30.2 Net debt 2

Sa Sa* 178 HK 4.80 1,727 4 26 23 23.3 18.9 0.9 4.3 10.0 44.1 5 Net cash

Texwinca 321 HK 8.56 1,495 2 14 4 9.3 9.0 0.7 6.9 2.1 24.5 Net debt 19

I.T* 999 HK 6.66 1,034 4 32 21 17.6 14.5 0.6 2.8 3.4 16.9 6 Net cash

Emperor Watch & Jewellery 887 HK 1.12 851 4 233 31 14.0 10.7 0.1 2.1 2.3 19.5 6 Net cash

Bonjour* 653 HK 1.37 517 2 23 22 16.8 13.7 0.7 4.7 15.5 99.6 4 Net cash

Average 52 17 17.4 14.8 1.0 3.6 6.0 36.3

China specialty retailers/other brands

Belle* 1880 HK 15.10 16,343 26 11 18 28.7 24.3 2.6 0.9 5.7 21.0 5 Net cash

Gome* 493 HK 2.77 5,980 25 24 19 16.0 13.5 0.7 1.9 2.5 16.1 11 Net cash

Hengdeli* 3389 HK 4.54 2,562 7 19 21 24.6 20.4 1.3 1.5 3.8 16.9 1 Net cash

Bosideng 3998 HK 2.37 2,364 9 20 4 10.1 9.7 0.5 7.9 2.2 20.8 35 Net cash

China Lilang* 1234 HK 11.10 1,710 3 39 21 20.4 16.8 0.5 2.4 5.3 28.0 2 Net cash

Trinity* 891 HK 8.62 1,874 6 35 31 29.5 22.4 0.8 1.9 5.9 21.0 Net debt 10

Boshiwa 1698 HK 5.19 1,382 2 44 47 20.6 14.0 0.5 1.4 2.9 14.9 19 Net cash

Ports 589 HK 21.30 1,554 5 19 22 18.2 15.0 0.9 3.2 5.3 31.7 2 Net cash

Daphne 210 HK 6.32 1,328 4 30 20 13.4 11.2 0.5 2.1 3.0 23.8 14 Net cash

Pou Sheng 3813 HK 1.17 644 0 96 28 11.3 8.8 0.1 NA 0.8 6.9 Net debt 4

Sparkle Roll* 970 HK 1.50 573 2 40 33 19.0 14.3 0.5 1.1 3.3 17.1 1 Net cash

Evergreen 238 HK 3.80 479 1 (9) 26 15.5 12.3 NA 2.3 2.0 13.4 36 Net cash

China Nepstar NPD US 3.63 378 1 295 (1) 45.9 46.5 0.2 4.0 2.1 4.3 46 Net cash

Huiyin App 1280 HK 1.80 242 1 56 (35) 5.9 9.1 0.1 NA 1.0 13.0 Net debt 40

Average 51 18 20.0 17.0 0.7 2.5 3.3 17.8

(continued on following page)


6

Valuations summary

Stock Share price Market cap 3M average value traded EPS growth (%)# PE (x) PE/G (x) Yield (%) P/B ROAE Net cash/share Net gearing

Company Code (local currency) (US$m) (US$m) CY11 CY12 CY11 CY12 CY11 CY11 CY11 CY11 (%) (%)

Department stores

Golden Eagle 3308 HK 20.80 5,189 13 27 27 28.5 22.4 1.1 1.2 7.8 30.0 5 Net cash

Parkson Group 3368 HK 11.98 4,321 10 20 22 24.3 19.8 1.2 1.9 5.4 24.4 8 Net cash

Intime 1833 HK 12.00 2,943 6 1 27 26.2 20.7 34.0 1.6 3.6 14.2 Net debt 25

Maoye 848 HK 3.89 2,574 2 22 42 24.4 17.2 1.1 1.2 3.7 14.7 Net debt 45

Springland* 1700 HK 6.68 2,143 2 66 30 23.2 17.9 0.4 1.7 3.4 15.5 10 Net cash

NWDS China 825 HK 6.96 1,506 2 10 8 18.2 16.9 1.8 2.3 2.2 12.6 31 Net cash

PCD Stores 331 HK 2.11 1,144 3 26 28 18.1 14.1 0.7 1.7 2.9 17.0 4 Net cash

Shirble Store 312 HK 1.53 491 1 (2) 26 13.4 10.7 NA 2.3 2.0 15.1 56 Net cash

Average 21 26 22.0 17.5 5.7 1.7 3.9 17.9

Sportswear brands

ANTA Sports* 2020 HK 12.22 3,911 12 15 12 14.6 13.0 1.0 4.1 4.1 29.4 16 Net cash

China Dongxiang* 3818 HK 2.60 1,891 7 (21) 10 10.9 9.9 NA 6.4 1.6 15.1 52 Net cash

Li Ning* 2331 HK 13.78 1,862 9 (28) 7 15.4 14.4 NA 2.6 3.3 22.4 9 Net cash

Peak Sport* 1968 HK 6.18 1,664 4 21 15 11.2 9.8 0.5 3.6 2.7 26.1 23 Net cash

Xtep* 1368 HK 5.38 1,502 3 18 15 10.5 9.1 0.6 4.8 2.6 26.4 24 Net cash

361 Degrees* 1361 HK 5.27 1,399 3 18 16 8.0 6.9 0.5 5.7 2.1 28.2 23 Net cash

Average 4 12 11.8 10.5 0.6 4.5 2.7 24.6

# Calculated in HK dollar terms

* Denotes CCBIS estimates

Note: Based on share closing prices on 28 April 2011

Source: Bloomberg, CCBIS estimates


7

Far from saturated

Hong Kong enjoys a well-earned reputation as the top overseas destination for

mainland shoppers seeking high quality and safe cosmetics products. It is estimated

that mainland tourists accounted for up to 30% of Hong Kong’s retail sales in

cosmetics, skincare and toiletry products in 2009. The strong franchise – “Asia’s

shopping paradise“ – has supported exceptional growth within the cosmetics retail

segment, which has achieved an 18% CAGR in value terms since 2007, compared

with the already high CAGR of 12% for the overall retail market in the territory. Such

outperformance is bound to continue as increased mainland spending drives the retail

market in Hong Kong in an environment where the renminbi is appreciating and with

the relaxation of the tourist visa scheme; local cosmetics retailers are well positioned

to take advantage of the consumption boom.

Total sales and growth of Hong Kong’s cosmetics market

0

1

2

3

4

5

6

7

8

9

10

31-Mar-07 31-Aug-07 31-Jan-08 30-Jun-08 30-Nov-08 30-Apr-09 30-Sep-09 28-Feb-10 31-Jul-10 31-Dec-10

HK$b

0%

5%

10%

15%

20%

25%

30%

35%

Cosmetics sales in HK (LHS) YoY (RHS)

Source: Bloomberg

“Cosmetics Central” in the eyes of mainland shoppers

Judging by the influx of mainlanders traveling to Hong Kong every year, the city has

become the overseas shopping destination of choice of mainlanders, a place where

shoppers spend a considerable portion of their time and budgets. Mainland travelers

made up 64% of total visitor arrivals in Hong Kong in 2010, with a rate of growth

outpacing total travelers visiting Hong Kong last year. The Hong Kong Tourism Board

projects visitor arrivals will increase 10% YoY to 40m, and mainland visitor growth will

continue to rise by 12% YoY to 25m in 2011.

Cosmetics sales growth

outpacing total retail sales growth

in Hong Kong

Hong Kong is the number-one

shopping destination for

mainland visitors


8

Total tourist arrivals to Hong Kong and growth Mainland tourist arrivals and growth

0.0

1.1

2.2

3.3

4.4

5.5

6.6

Jan & Feb

-07

Apr-07

Jun-07

Aug

-07

Oct-07

Dec-07

Mar-08

May-08

Jul-0

8

Sep

-08

Nov-08

Jan & Feb

-09

Apr-09

Jun-09

Aug

-09

Oct-09

Dec-09

Mar-10

May-10

Jul-1

0

Sep

-10

Nov-10

Jan & Feb

-11

m

(15)%

0%

15%

30%

45%

Total visitor arrivals (LHS) Total visitor arrivals YoY (RHS)

0.0

0.8

1.6

2.4

3.2

4.0

4.8

Jan & Feb

-07

Apr-07

Jun-07

Aug

-07

Oct-07

Dec-07

Mar-08

May-08

Jul-0

8

Sep

-08

Nov-08

Jan & Feb

-09

Apr-09

Jun-09

Aug

-09

Oct-09

Dec-09

Mar-10

May-10

Jul-1

0

Sep

-10

Nov-10

Jan & Feb

-11

m

(15)%

0%

15%

30%

45%

60%

China Visitor arrivals (LHS) China visitor arrivals Yoy (RHS)

Source: Bloomberg, CEIC, Hong Kong Tourism Board Source: Bloomberg, CEIC, Hong Kong Tourism Board

Mainland travelers on average spend over 70% of their total spending (equivalent to

HK$3,500) on shopping during their stays. On the basis of rising income levels, the

propensity of mainland tourists to spend, and ever-more-buoyant sentiment, we

expect per capita spending from mainland shoppers to continue to strengthen and

support local retail sales.

Mainland spending on shopping Per capita spending on shopping from mainland visitors

0

15,000

30,000

45,000

60,000

75,000

90,000

2003 2004 2005 2006 2007 2008 2009 2010

HK$m

65%

67%

69%

71%

73%

75%

77%

Mainlanders spending (LHS)

Mainlanders spending on shopping (LHS)

Shopping spending as % of overall spending (RHS)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2003 2004 2005 2006 2007 2008 2009 2010

HK$

(25)%

(20)%

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

China visitor per capita spending (LHS)

China visitor per capita spending on shopping (LHS)

China visitor per capita spending on shopping YoY (RHS)

Source: CEIC Source: CEIC

Cosmetics products are often at the top of the shopping lists of mainland tourists for

several compelling reasons:

� Competitive prices: The Chinese government has imposed import tariffs on

top of a 17% VAT, a 30% consumption tax and product registration costs on all

foreign cosmetic products in China. These extra costs do not apply in

Hong Kong. There are also no import duties on cosmetics and skincare

products in Hong Kong and registration is not required for cosmetics products.

This has resulted in price arbitrage in the 70% range. The cheaper prices make

Hong Kong cosmetics retailers more competitive.


9

Import duties for major cosmetics products in China

HS Code Product Import duty (%)

33030000 Perfume 10.0

33041000 Lip gloss and lipstick 10.0

33042000 Eye makeup 10.0

33043000 Manicure and pedicure products 10.0

33049100 Face powder puffs and pads 10.0

33049900 Other beauty or makeup products including lotions, sun-tan oil 6.5

33051000 Shampoo 6.5

33053000 Mousse 10.0

Source: Custom General Administration, CCBIS

� Comprehensive product offerings. There is a wide variety of cosmetics

products on offer in Hong Kong in part because most local retailers closely

follow overseas trends in the hopes of enticing a market highly knowledgeable

of, and receptive to, foreign products. Government regulations restrict the

number of brand offerings in China leading mainland tourists to travel to Hong

Kong to purchase personal care products from the wide variety on offer there. In

China, cosmetics manufacturers must have both a cosmetics manufacturer’s

hygiene permit and a cosmetics production license. Both of these require testing

that is time consuming and costly, and when the license is finally secured it lasts

only four years.

� Quality assurance. We believe mainland Chinese visitors are attracted to

purchase cosmetics products in Hong Kong over China, given the perceived

authenticity and reliability of the Hong Kong products, which are protected by

well-established and rigorous intellectual property laws, which in the judgment

of many affluent Chinese consumers, outweigh price considerations.

� Parallel trade. Parallel imports, known as “grey markets”, refer to a

cross-boarder and non-counterfeit products sold without official permission from

the intellectual property owner. The Chinese government has banned all

cosmetics retailers from selling parallel products within China. However, given

that parallel products are typically 30-40% cheaper than sanctioned distributed

products, the favorable prices attract a larger customer pool to purchase in

Hong Kong.

Benefitting from the expansion of the individual visit scheme and appreciation of the renminbi

In July 2003, China launched its individual visit scheme (IVS), a set of regulations

permitting mainland tourists to visit the Hong Kong Special Administrative Region

individually rather than as part of a tour. As we elaborate below, the program has

since been expanded several times, resulting in ever larger numbers of mainland

tourists descending on Hong Kong each year.

China’s relaxed visa scheme has

been a boon to Hong Kong

retailers as more mainland

visitors cross the border


10

IVS tourist arrivals

0

1

2

3

4

6

7

Mar-07 Sep-07 Apr-08 Oct-08 May-09 Nov-09 Jun-10 Dec-10

m

(16)%

(6)%

4%

14%

24%

34%

44%

54%

Total visitor arrivals (LHS) China visitor arrivals (LHS)

Total visitor arrivals YoY (RHS) China visitor arrivals YoY (RHS)

Source: Hong Kong Post, Hong Kong Tourism Board

The most recent and impactful change to the IVS has been the expansion of the

scheme to include non-Guangdong residents in Shenzhen, which in our view

contributed significantly to the strong pickup in the Hong Kong retail market in 2010.

Due to the success of the IVS, we anticipate the Chinese government will further

loosen its visa policy. A potential form of relaxation scheme might be implemented for

other major mainland cities, including those in the three provinces of northeast China

and the provinces of Zhejiang and Jiangsu.

Individual visit scheme city coverage

Effective date Individual visit scheme

28 July 2003 Donguang, Foshan, Zhongshan, Jiangmen

20 August 2003 Guangzhou, Shenzhen, Zhuhai, Huizhou

1 September 2003 Shanghai, Beijing

1 January 2004 Shantou, Chaozhou, Meizhou, Zhaoqing, Qingyuan, Yunfu

1 May 2004 Shanwei, Maoming, Zhangjiang, Shaoguan, Jieyang, Heyuan, Yangjiang

1 July 2004 Nanjing, Suzhou, Wuxi, Hangzhou, Ningbo, Taizhou, Fuzhou. Xiamen, Quanzhou

1 March 2005 Tianjin, Chongqing

1 November 2005 Chengdu, Jinan, Dalian, Shenyang

1 May 2006 Nanchang, Changsha, Nanning, Haikou, Guiyang, Kunming

1 January 2007 Shijiazhuang, Zhengzhou, Changchun, Hefei, Wuhan

1 April 2009 launch of year-round multiple-entry visa arrangements for Shenzhen residents

15 December 2010 non-Guangdong residents in Shenzhen

Source: China News, China National Tourist Office

The renminbi has appreciated 27% against the Hong Kong dollar, which since 2005

has been pegged to the US dollar. Revaluation of the renminbi has significantly

enhanced the purchasing power of mainland shoppers visiting Hong Kong, fuelling

their shopping sprees, encouraging them to visit more often and spend more on each

trip. Meanwhile, local consumers have also shown a greater propensity to shop within

their home market. As the renminbi has appreciated, so too has strength in the Hong

Kong retail market. In late 2009, when the renminbi began to take off, Hong Kong

shops suddenly swelled with Chinese tourists. CCBIS estimates that the renminbi will

appreciate by 7%, 5% and 5% in 2011-2013, respectively, which, in our view, will

result in a feeding frenzy by mainland shoppers within the malls and retail outlets of

Hong Kong.

Strong likelihood of adding more

cities to the IVS list


11

Renminbi vs. Hong Kong dollar

0.95

1.00

1.05

1.10

1.15

1.20

Jan-06 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11

HK$/RMB

Source: Bloomberg

No fear of removal of cosmetics tariff

Local media is rife with speculation that China may reduce or even remove altogether

the 50% import tariff currently imposed on cosmetics and other luxury products, a

move that would add greater incentive to mainland consumers to shop locally. This

has been cause for concern for Hong Kong retailers and investors. Our advice to them

would be not to get too worked up over these rumors based for the following factors.

1. If the tariff was reduced or even cut, the spread between selling prices in China

and Hong Kong for the same products would likely remain material, due to

China’s VAT and consumption tax as well as the appreciating renminbi.

2. Brands operating in the mid-to-upscale market are unlikely to lower their selling

prices in China for fear of diluting their brand image and brand equity, even if

the tariff were lowered.

Worries over the removal of

cosmetics tariff are overplayed


12

Buoyant outlook for domestic consumption

Hong Kong’s retail market has taken a sharp upturn since 2009 as the impact of the

financial crisis subsided. Besides the marked increase in tourist spending, robust

consumption by local consumers has been a key contributor and we believe the

prospects for strong local consumption patterns remains promising.

There are several reasons we think the favorable trends we are seeing will continue.

First, wage and household income growth is accelerating across the board for

Hong Kong workers. In the meantime, the jobless rate in Hong Kong is at 3.4% in

March 2011, its lowest level since 2009. Consumers are confident and the economy

has the appearance of being quite stable. Add to the mix the buoyant property market

and one can see why consumption patterns have been rampant of late.

Hong Kong retail sales growth Hong Kong nominal wage growth

0

10

20

30

40

Apr-07

Jun-07

Aug

-07

Oct-07

Dec-07

Feb

-08

Apr-08

Jun-08

Aug

-08

Oct-08

Dec-08

Feb

-09

Apr-09

Jun-09

Aug

-09

Oct-09

Dec-09

Feb

-10

Apr-10

Jun-10

Aug

-10

Oct-10

Dec-10

Feb

-11

HK$b

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Retail sales (LHS) Retail sales YoY (RHS)

135

140

145

150

155

160

165

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

HK$

(3)%

(2)%

(1)%

0%

1%

2%

3%

4%

5%

Nominal wage value (LHS) YoY (RHS)

Source: Bloomberg, Census and Staistics Department Source: Bloomberg

Hong Kong monthly unemployment rate Centa-City leading index CCL

3.0%

3.4%

3.8%

4.2%

4.6%

5.0%

5.4%

5.8%

Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bloomberg, Census and Staistics Department Source: Centadata

Local economy remains buoyant,

creating a healthy retail

environment


13

We expect local consumption in Hong Kong to receive an additional boost from the

government’s plan to distribute HK$6,000 in cash handouts some time in the next few

months. This is in addition to the HK$6,000 tax rebate in 2011 to all Hong Kong’s

permanent residents as part of its relief measures. These disbursements are

unprecedented and will have a strong and positive impact on Hong Kong’s consumer

market, in our view. It is estimated that HK$41b in total will be given away, a sizeable

amount when one considers that the entire Hong Kong retail market amounted to

HK$325b in 2010.

Local retailers benefit from

“wealth-sharing” windfall


14

Dominant players continue to lead

We believe the best way to play the cosmetics theme in China and Hong Kong is

through Hong Kong-listed players, Bonjour and Sa Sa, the two leading cosmetics and

personal product retail store chains in Hong Kong, enjoying strong consumer

recognition both domestically and among mainland shoppers. Their flexible operating

models and popular franchises keep them ahead of peers who can only envy their

wider customer base.

Together owning over half of the cosmetics market share in Hong Kong and an

extensive network covering major shopping areas within the city, both Bonjour and

Sa Sa are well positioned to accommodate the rising number of mainland tourists who

seem to have an insatiable appetite for branded cosmetics products, an area both

companies specialize in. Both retailers are among the top-ten favourite brands in

Hong Kong according to Retail Asia Magazine. They are gaining wide popularity and

recognition among mainland customers. With consumers now exhibiting a greater

propensity to spend, demand for cosmetics products will only increase and support

long-term growth for the two dominant players.

A new dimension of the cosmetics retailing business

A major attraction of Bonjour and Sa Sa in the eyes of locals and visitors is their focus

on “cosmeceuticals”, a term coined to define a group of products that combine

cosmetics with vitamins, herbs and pharmaceuticals.

Both operators derive more than 25% of their sales from non-cosmetics related

products using a “one-stop cosmetics specialty store” concept. Their range of

products includes not only cosmetics but also spans haircare, health food and beauty

accessories. Take the example of the ingredient aloe vera, which has been used

extensively in both medical and beauty treatments in the cosmetic/healthcare

community. We find it in slimming teas, diet pills, fiber pills and meal replacement

drinks.

Milk powder is also popular on the shopping lists of mainland visitors who still have

the melamine-tainted milk powder scandals of two years ago on their minds. Mainland

parents cross the border to snatch up milk products in Hong Kong, secure in the

knowledge that Hong Kong’s regulatory regime has put great emphasis on food

quality and safety.

Bonjour was one of the earliest cosmetics retailers to offer Japanese and Australian

baby milk formula in Hong Kong. The retailer has a pool of loyal customers and wide

recognition among mainland shoppers given its comprehensive brand offerings and

stable supply.

Strong franchises behind industry

leadership

Creating a “one-stop” shopping

experience

Hong Kong has become a quality

milk powder hub


15

Bonjour slimming products Japanese milk powder distributed by Bonjour

Source: Bonjour’s website Source: Bonjour’s website

One interesting trend we have been following for some time is the upswing in demand

for men’s skincare products, driven in large part by the desire to gain a competitive

edge within Hong Kong’s highly competitive workplace. The male grooming market is

a rapidly growing segment with much potential. Both Bonjour and Sa Sa are on top of

this trend and are marketing their respective products accordingly. Witness Sa Sa’s

“Methode Swiss” and “Suisse Programme”, both established popular male cosmetics

lines. Although products geared to the male market only accounted for 13% of the

total Hong Kong cosmetics market in 2008, the segment is expected to see

exponential growth over the next few years.

Suisse Programme men’s product set Methode Swiss men’s care set

Source: Sa Sa’s website Source: Sa Sa’s website

In addition to the traditional distribution channels, Bonjour and Sa Sa have the added

advantage of being more flexible in offering different tiers of cosmetics brands. For

example, they sell branded cosmetics imported from parallel import sources and/or

grey market dealers and mass-market non-branded products from Japan, Taiwan,

Korea, US and the EU.

Expanding into the growing male

grooming market


16

An extensive range of products coupled with many tiers of cosmetics and

non-cosmetics allow both Bonjour and Sa Sa to cater to a wide range of different

consumer needs. Both Bonjour and Sa Sa carry over 15,000 stock-keeping units

(SKU) representing over 400 local and international cosmetics brands, with a broad

price range from mass market to premium.

The popularity of specialty retailers has risen in recent years on the wave of “one-stop

convenience shopping”. According to Datamonitor, specialty retailers lead Hong

Kong’s cosmetics retailing market with a 42% share, followed by supermarkets (19%),

department stores (17%), independent retailers (10%) and pharmacies (5%) in 2009.

Extensive presence in major tourist spots

To capture the growing spending power of mainland shoppers, Bonjour and Sa Sa

have established wide coverage over prime shopping precincts in Mongkok,

Tsimshatsui and Causeway Bay. Bonjour and Sa Sa often establish more than one

shop within certain districts popular with travelers, so it should not come as a surprise

that over 60% of stores for both retailers are located in tourist areas, constituting more

than one-third of both retailers’ total sales in Hong Kong.

Besides expanding network coverage into major tourist spots, Bonjour and Sa Sa are

eyeing residential communities, thereby creating more opportunities to capture

growing demand from local consumers.

Since 1997, there have been more than 620,000 mainlanders residing in Hong Kong,

and the numbers are swelling. Areas on Hong Kong’s peripheries are popular

destinations, including Shatin, Sheung Shui and Tseung Kwan O. Anticipating

growing demand, Bonjour and Sa Sa have increased their store penetration into these

residential areas.

Growing importance of private labels and exclusive brands

Bonjour and Sa Sa currently sell over 100 brands or 2,000 SKUs from private labels

and labels with exclusive distribution rights. These private labels are exclusively

owned by the individual retailers, who have full authority to set their own prices and

gain attractive margins, often up to 80 or 90%.

Gross profit margins for Sa Sa and Bonjour products

Sourcing Gross profit margin range (%)

Private labels and products with exclusive distribution rights 80 – 90

Purchases from sole agents in Hong Kong 25 – 40

Parallel imports from overseas 5 – 15

Source: Bonjour, Sa Sa

Bonjour and Sa Sa have placed heavy emphasis on promoting their self-owned/

exclusive products. Sales contribution from exclusive or self-owned brand products

jumped from 20% in FY09 to 22% in FY10 for Bonjour and increased from 38% in

FY10 to 40% in 1HFY11 for Sa Sa.

Going forward, management from both retailers are keen to introduce more exclusive

products to the market, a strategy designed to garner higher margins and profitability

through better marketing and product mix adjustments. The on-going gross margin

uptrend provides Bonjour and Sa Sa with an important buffer against rising rents.

Comprehensive product offerings

Strong network established in

major tourist shopping areas

Growing penetration into

residential communities to

capture local consumer sales

House brands offer Bonjour and

Sa Sa higher margins


17

Key industry risks

Policy risk on China visa scheme. Approximately 50% of Sa Sa’s retail sales and

35% of Bonjour’s retail sales in Hong Kong come from mainland tourists. This leaves

both companies vulnerable to any adjustments in China’s travel regulations. Although

the Chinese government is unlikely to change the current individual visit scheme, any

tightening in this regard would affect inbound visitor volume to Hong Kong, reducing

foot traffic and ultimately lowering Sa Sa and Bonjour sales. The market is anticipating

a further relaxation on visas to Hong Kong in other China regions.

Exposure to parallel products. Parallel imports, also known as “grey markets”, refer

to cross-boarder non-counterfeit products sold without official permission from the

intellectual property owners. Parallel trade accounts for over 20% of products sold by

Bonjour and Sa Sa, so their sales and operating models will be hit if the Hong Kong

government prohibits parallel trade activities, an outcome very hard to predict.

Nonetheless, Bonjour and Sa Sa are switching their focus to expanding their

self-owned brands, which we believe would minimize the reliance on parallel

products.

Rising rents. Rental pressure is a growing risk for retailers, and Bonjour and Sa Sa

are no exceptions. Buoyed by the strong asset market in Hong Kong, rentals for prime

retail locations have risen over 20-50% on average over the last few years. Bonjour

and Sa Sa have wide exposure to rental stores and are, therefore, susceptible to

rising rents, which could ultimately affect its pace of expansion. Both companies need

to sustain healthy levels of same-store sales growth to avoid seeing their rental

expense ratios get out of hand. For now, Bonjour and Sa Sa enjoy significant

bargaining power facilitated by wide brand recognition. They are likely to remain in a

good position to secure relatively reasonable rental terms.

Currency risk. Although the risk of renminbi depreciation is limited, any slowdown in

renminbi appreciation will hurt the sentiment of mainland shoppers, and as a result

affect tourist spending on Bonjour and Sa Sa products. Moreover, Sa Sa and Bonjour

source some of their products directly from Europe, Japan, Korea and the U.S. and

are thus exposed to currency fluctuations. Sa Sa also has overseas business

transacted in the local currency of the country where the business was conducted.

Neither cosmetics retailer is engaged in foreign currency hedging activity.

Risks related to China business. The China business will expose Bonjour and

Sa Sa to new risks given the operating landscape in China is very different from that

of Hong Kong insofar as it has much greater exposure to regulatory, political and

currency fluctuation risks. For one, the prolonged product registration process would

create a major obstacle for retailers wishing to import cosmetics products. Moreover,

China does not allow parallel trading and could impose heavy fines on offenders.


18

SWOT analysis

Strengths

� Strong recognition by Chinese mainlanders and recognizable household brands

in Asia

� Hefty cash pile on top of strong balance sheet

� Wide range of product offerings covering different customer segments and

lower inventory risk

� Long established industry leaders with strong bargaining power with landlords

and brand distributors

� Well-rated management with unmatched market knowledge and cosmetics

trend foresight

Weaknesses

� Significant reliance on mainland consumers

� Heavy exposure to the Hong Kong consumer market

Opportunities

� Robust demand for quality cosmetics products in China

� Greater focus on private labels to improve margins

� Introduction of additional house brands or exclusive distributed products

� Increased penetration in other Southeast Asia countries on top of the existing

network

Threats

� Competition from international distributors as more brand owners are expanding

into Hong Kong and China’s markets given the upbeat demand


19

Bonjour Holdings (653 HK)

Chinese consumers say “Bonjour” to affordable cosmetics

Company Rating:

Outperform (initiation)

Bonjour, the second-largest cosmetics retailer in Hong Kong,

appeals to the mass-market by concentrating on affordable

cosmetics products. Over the years it has built a brand well

recognized by local and mainland consumers. It is now in

position to capitalize on the voracious demand of mainland

shoppers streaming across the border in search of

value-for-money cosmetics. Bonjour’s business model is unusual

in that it is a retail business that also operates beauty salons.

� Dual operation. Bonjour operates both retail stores and

beauty salons in an effort to meet rising customer needs.

The dual operation not only allows Bonjour to capture the

booming demand for quality beauty services, but it also

creates an effective channel to distribute and promote

Bonjour’s house brands.

� Milk products particularly appealing. Bonjour has a

reputation for offering safe high-quality milk formula. Its milk

powder products are credited with driving store traffic.

� Expect margin improvement. Bonjour sells more than

150 house brands and has plans to introduce more as they

tend to be highly profitable.

� Taste of success in China. Bonjour’s pilot store in

Guangzhou surprised management by achieving

breakeven within a year. Disciplined network expansion

and a widely recognized household brand will hold the

company in good stead as it attempts to tap into the vast

potential of the China market.

� Undervalued. At only CY12F 14x PE, the stock is trading

at a PE discount to its peers. Bonjour has high earnings

visibility with forecasted EPS CAGR growth of 23% for

FY10-13F. We rate the stock Outperform and we set our

target price at HK$1.60 based on an undemanding target

of CY12F PE of 16x and PE/G of 0.7x.

Forecast and valuation

Year to 31 Dec 2009 2010 2011F 2012F 2013F

Revenue (HK$ m) 1,705 2,121 2,573 3,087 3,627

Revenue (YoY, %) 23 24 21 20 18

Net profit (HK$ m) 128 191 235 288 352

Net profit (YoY, %) (4) 49 23 22 22

EPS (HK$) 0.047 0.066 0.081 0.100 0.122

EPS (YoY, %) (4) 40 23 22 22

PER (x) 28.58 20.38 16.57 13.54 11.08

Yield (%) 4.3 4.2 4.7 5.9 7.2

FCF yield (%) 7.2 10.6 14.1 17.4 21.2

ROAE (%) 79 106 100 100 100

Net gearing (%) Net cash Net cash Net cash Net cash Net cash

Source: Bonjour data, CCBIS estimates

Price: HK$1.35

Target: HK$1.60

(initiation)

Trading data

52-week range HK$0.97–1.84

Market capitalization (m) HK$3,974/US$517

Shares outstanding (m) 2,943

Free float (%) 31

3M average daily T/O (m share) 9.0

3M average daily T/O (US$m) 1.6

Expected return (%) – 1 year 24

Closing price on 28 April 2011

Stock price and HSI

1.0

1.2

1.4

1.6

1.8

28-Apr-10 28-Jun-10 28-Aug-10 28-Oct-10 28-Dec-10 28-Feb-11 28-Apr-11

HK$

Bonjour HSI

Source: Bloomberg

Claudia Ching (852) 2532 2528 [email protected]

Timon Tai (852) 2532 2574 [email protected] Forrest Chan, CFA (852) 2532 6743 [email protected]


20

Head-to-toe catering to customers

Bonjour began operations in 1991 with only one shop and a handful of employees,

and grew to become the second-largest cosmetics retailer in Hong Kong, with market

share of around 20%. Since its establishment, the group has gained a firm foothold in

the mid-mass segment with its retail network covering Hong Kong (41 stores), Macau

(1 store) and China (2 stores).

Bonjour now sells more than 20,000 SKUs of beauty and healthcare products. Unlike

other well-known health and beauty retailers focusing solely on luxury brands, Bonjour

carries an extensive range of products in every price range, and is best positioned

among its peers to secure a wider clientele.

Bonjour shop Bonjour shop

Source: Bonjour Source: Bonjour

In order to capture the growing demand in Hong Kong for premium beauty services,

Bonjour expanded into the slimming business in 2000 through the brand name “About

Beauty” and other auxiliary beauty services under the brands “Dr. Protalk”, “Top

Comfort” and “Bonjour Nail Bar”. “About Beauty” provides a range of slimming, beauty

and spa treatments. Other auxiliary beauty services include comprehensive and

professional quality beauty services, such as facial treatments, manicure services and

foot massages. Bonjour also has an online sales platform through

http://www.bonjourhk.com.

Each of Bonjour’s outlets is a one-stop shopping destination for health and beauty

products offering professional advice to customers. By operating all of its 55 retail

outlets and beauty salons, Bonjour has been able to deliver consistent service quality,

and is positioned to be the key beneficiary of Hong Kong’s buoyant retail environment.

Dual business with multi-faceted sales channels

Bonjour is the only beauty product retailer operating both cosmetics retail stores and

beauty salons in Hong Kong, a dual operation model that avails the company of an

extra pool of customers seeking quality beauty services. Bonjour promotes its in-house

products in its own beauty parlors, which creates an effective distribution channel for

its house brands and provides synergies for its house brands’ sales and development.

Strength lies in its wide selection

of cosmetics products at

discounted prices

The only cosmetics retailer in

Hong Kong also operating beauty

salons


21

Corporate structure

Bonjour Holdings Limited

(653 HK)

Retail ChainBonjour Retail

Store Chain

Beauty

About Beauty

（（（（悦榕庄悦榕庄悦榕庄悦榕庄））））

Auxiliary BeautyServices

Dr. Protalk

Top Comfort

（（（（水云庄水云庄水云庄水云庄））））

Bonjour Nail Bar

Source: Bonjour

Retail stores

Bonjour sells a wide range of cosmetics and skincare products amounting to

approximately 20,000 SKUs available in store. Authorized dealers or local agents

supply 49% of its products, while parallel imports and private labels account for 29%

and 22%, respectively. Its products tend to be on average 5% cheaper than those sold

by its rivals.

Sales breakdown by sourcing channel

20% 22%30%

51% 49%45%

29% 29% 25%

0%

20%

40%

60%

80%

100%

2009 2010 2015F

Parallel imports from overseasPurchase from sole agents in Hong KongPrivate labels & products with exclusive distribution rights

Source: Bonjour

Beauty and health salon services

Noting the growing popularity of slimming and shaping services, management

launched its beauty and health business in 2000 as a means of further diversifying the

company’s business and generating attractive margins of over 90%.

Bonjour currently operates 12 “About Beauty” beauty parlors in Hong Kong and

Macau, seven of which provide auxiliary beauty services under the franchise names

“Dr. Protalk”, “Top Comfort” and “Bonjour Nail Bar“.


22

About Beauty shop Top Comfort shop


“Bonjour Beauty” provides a full range of high quality treatment services including

facials, slimming, spa and body massages, nail art and foot massages. Most of these

services are considered premium services. Experienced beauty consultants,

beauticians and massage therapists are hired to ensure that a high standard of

personal care is provided.

Customers are requested to open an individual account whereby services are offered

as part of pre-paid packages. Fees paid for these beauty treatment packages are

non-refundable and terms of these packages range from one month to two years.

Bonjour’s beauty and health salon segment accounted for 10% of total sales in FY10.

Growth was driven by an increase in membership signups as well as network

expansion. We expect its beauty and health salon service business to remain

dynamic, with the more mature client base driving operating leverage. Management

guided that the business generally requires six-to-nine months to achieve breakeven

in terms of operating profit.

One of mainland customers’ favourite shops

Mainland tourists account for 35% of Bonjour’s retail sales with average ticket size of

about HK$600, triple the average spending of a local customer. Bonjour offers a

comprehensive range of popular cosmetics products with attractive pricing, making it

a must visit shop for mainland tourists favoring cosmetics. The company will continue

to strengthen its marketing campaign in China in an effort to attract more tourists and

increase the retail sales proportion of locals to tourists, from 35% to 50% in five years.

Milk powder business: Bonjour is one of the earliest cosmetics retailers offering

Japanese baby milk formula in Hong Kong. This business constituted 11% of the

company’s total sales in FY10. Many mainland mothers worried about the quality of

mainland milk products, travel to Hong Kong to purchase baby foods which they

perceive to be much safer. Margins of around 6-8% are less attractive than margins

for skincare or bodycare products; nevertheless, the distribution of Japanese milk

powder serves as an effective tool to gain access to a different segment of customers.

While concerns over the spread of radiation in Japan may weaken consumer

confidence, Bonjour is switching the sourcing of its milk formula from Japan to

Rising contribution from mainland

shoppers

Reputation for quality milk power


23

Australia. Australian milk-formula products offer higher gross margins than Japanese

milk formula, and are expected to boost Bonjour’s overall earnings in the long-run.

Collaboration with Ctrip: Bonjour has strengthened its marketing campaign in China

to attract more tourists to its Hong Kong stores. Part of this effort includes teaming up

with Ctrip.com International, a major online travel service portal in mainland China, to

issue VIP cards for Bonjour customers.

First triumph in the China market

Bonjour’s first foray into the mainland began was its pilot store in Guangzhou in

July 2010. Bonjour is now a well recognized brand in China, known for its affordable,

high-quality and wide-ranging product offerings. Its pilot store achieved breakeven in

profit within six months of operation and a purported HK$5m in sales in 2010.

Bonjour Guangzhou shop Bonjour Guangzhou shop


Product offerings and displays in its China stores are different from those of Hong

Kong. As Bonjour still targets the mass-to-mid market customer group in China,

domestic brands will begin to play a more significant role in the country. They currently

account for approximately 60% of total sales. Imported brands and Bonjour’s

self-owned labels account for 40% of Bonjour’s China store products. Imported

products are mostly sourced from local authorized agents to save time and/or avoid

high operation costs.

There are currently 2,000 SKUs available in the Guangzhou store, including 200

private labels made in China. Management is targeting 3,000-4,000 SKUs by 2012,

with emphasis on skincare merchandise. Bonjour will source the majority of its

products from high-quality local suppliers.

Sustainable growth in the future

On the heels of the success of its pilot store in Guangzhou and the overall positive

outlook for the economy. Bonjour opened two new stores in 1Q11. It plans to maintain

a prudent pace of expansion within China. The company targets adding two-to-three

retail stores with an average floor area of 2,500 sq ft in 2011 and eight more stores in

2012.

Superior performance from China

business

Keeping average sales per store

high, on relatively modest

expansion in China


24

New openings will be concentrated in Guangzhou, where Bonjour already has a strong

franchise. The city’s close proximity to Hong Kong also gives management tighter

control over its China business and back office. Disciplined expansion into China will

provide Bonjour with margin stability and will support its long-term development in the

China market.

Go online

Besides mainland Chinese, Bonjour is looking to attract more customers from

overseas. In 2005, Bonjour launched an online shopping portal designed to promote

its brands and products, the prices of which are claimed to be the lowest and which

offer the best value compared with others. The portal provides a convenient and

reliable online platform for customers worldwide and is gaining popularity with

20-30% YoY growth p.a. We believe the online business could help Bonjour promote

its brands in overseas markets to capture a larger customer base.

Partnership with Town Health

Bonjour entered into partnership with Town Health (3886 HK, Not Rated) in April 2010,

with the latter holding a 4.6% stake in Bonjour. The partnership brings strong

synergies to Bonjour, particularly in the following two business lines.

1. Beauty treatment. Town Health avails Bonjour of its expertise and physicians,

both useful to Bonjour's medical cosmetics services.

2. Retail. Town Health would refer clients to Bonjour’s healthcare and skincare services and products.

In return, Town Health’s health supplements will be sold in Bonjour’s stores. We view

Bonjour’s partnership with Town Health as a big positive for Bonjour. We believe it will

provide a boost to the company’s brand image and will expand its customer pool.

Extensive coverage on top of cautious store rollout

Bonjour has 60 retail stores and beauty salons in Hong Kong and Macau and plans to

add four-to-five retail stores and two-to-three beauty salons per annum in FY11F and

FY12F. We approve of the measured pace of Bonjour’s expansion efforts as rents in

Hong Kong are rising. A conservative store rollout is one of the means of achieving a

stable operating margin.


25

Bonjour’s retail stores in FY07-13F Bonjour’s beauty salons in FY07-13F

30

26

33

39

44

49

54

1 1 1 1 1 2 21

6

14

25

0

10

20

30

40

50

60

2007 2008 2009 2010 2011F 2012F 2013F

No. of shops

Hong Kong Macau China

9

1415

1617

19

21

1 1 1 1 1 1 11 12

4

6

0

4

8

12

16

20

24

2007 2008 2009 2010 2011F 2012F 2013F

No. of stores

Hong Kong Macau China

Source: Bonjour, CCBIS estmates Source: Bonjour, CCBIS estmates

Currently, 65% of Bonjour’s stores are located in tourist areas. Management will keep

part of the new store rollout in busy shopping districts with high pedestrian traffic. It will

also expand its store network, especially beauty salons, into highly concentrated

residential areas where demand and spending power are strong; more importantly,

rents in residential areas tend to be cheaper than those in the main shopping districts.

This will help alleviate rental pressure. With the company’s diverse product mix and

customer base, we believe Bonjour can successfully deploy its stores in both

residential and tourist areas.

Shifting emphasis to private labels to support margins

Bonjour is engaged in the distribution, marketing and sale of over 150 brands and

2,500 SKUs of private labels and exclusive products. Gross profit margin from its

private labels and exclusive products is higher than all other products at 80-90%.

Gross profit margin for Bonjour products

Sourcing Gross profit margin (FY10) (%)

Private labels and products with exclusive distribution rights 80 – 90

Purchase from sole agents in Hong Kong 25 – 35

Parallel imports from overseas 5 – 15

Source: Bonjour

Going forward, Bonjour will put greater emphasis on the high value-added segment of

private labels and exclusive products, a strategy to garner higher margins through

better marketing efforts. Once management has enriched its product portfolio, it

intends to increase total contribution of its private labels from 22% to 30% within four

years.

Increasing penetration of

residential areas to alleviate

rental costs

Focus on promoting in-house

brands


26

Sales breakdown by product

51% 50% 49%

19% 18% 18%

11% 10% 10%

5%6% 5%

5% 6% 6%

9% 11% 12%

0%

20%

40%

60%

80%

100%

2009 2010 2015Skin care products Fragrance & cosmetics products Hair and body care products

Accessories Pharmaceutical products Health food

Source: Bonjour

Due to increased exposure to the lower gross-margin (approximately 6-8%) Japanese

milk-powder business, Bonjour has seen retail gross margin dilution in recent years.

Going forward, we believe the contribution from Japanese milk powder will decline

because of the concern on the quality of Japanese products on fears of radiation leaks.

We expect Bonjour’s retail gross margin to improve steadily.

Gross margin trends in FY07-13F

39.2%38.2%37.2%36.2%34.3%39.1%37.4%

94.8%93.8%92.8%91.8%90.6%91.1%89.8%

43.2%47.0%

40.8% 42.4% 43.1% 43.9% 44.9%

25%

40%

55%

70%

85%

100%

2007 2008 2009 2010 2011F 2012F 2013F

GPM for retail business GPM for beauty service business blended GPM

Source: Bonjour, CCBIS estimates

Effective cost control

Bonjour has an excellent track record of keeping stringent control on its expenses,

thanks to its greater efficiency and economies of scale.

Steady improvement in gross

profit margin


27

Operating cost breakdown for retail business in FY10

Operating cost breakdown for beauty salon business in

FY10

Rental

9.88%

Staff

10.39%

Marketing

0.93%

Utility &

building

management

0.65%Others

2.54%

Deprectiation

0.90%

Financial expense

0.75%

Staff

51%

Rental

16%

Marketing

10%

Deprectiation

7%

Others

4%

Utility & building

management

4%

Financial expense

8%


Bonjour’s two key expense items are rental and staff costs, with the cost trend

expected to be largely stable for the coming two years:

Rental cost – As a valued tenant, Bonjour enjoys a wider range of options for its store

locations thereby minimizing rental risk. Although we anticipate the average rental rate

to increase by over 20% in FY11-12F, we expect rental cost for its retail business to

remain within 11-12% of sales and that for beauty salons at 13-14% of total sales from

beauty salons.

Staff cost – Staff cost for the retail business accounts for approximately 10% of total

retail sales. The beauty salon segment usually entails higher staff costs due to the

needed recruitment of quality cosmetologists. However, thanks to the modest pace of

salon openings and management’s tight control on staff expenses, staff cost could still

be maintained at a reasonable level of 40% of total sales from the beauty salon

segment in FY11F and FY12F.

Rental costs in FY08-13F Staff costs in FY08-13F

161

226

282

416

348

183

14%

(2)%

19%

24%24%24%

11%

11%12% 11% 11% 11%

0

50

100

150

200

250

300

350

400

450

2008 2009 2010 2011F 2012F 2013F

(4)%

0%

4%

8%

12%

16%

20%

24%

28%HK$m

Rental costs (LHS) YoY (RHS) As % of sales (RHS)

218

355

430

512

248

289

15%

16%

14%

14% 14% 14%

18%

14%

17%

19%21%

23%

0

140

280

420

560

2008 2009 2010 2011F 2012F 2013F

HK$

12%

14%

16%

18%

20%

22%

24%

Staff costs (LHS) As % of sales (RHS) YoY (RHS)

Source: Bonjour, CCBIS estmates Source: Bonjour, CCBIS estmates

Major expenses remain well

contained


28

Diversified advertising campaign

In our view, it is critical that retailers target female customers. As a means to build

image and increase public awareness, Bonjour has implemented extensive

promotions, including in-store promotions, magazine advertisements, newspaper ads

and television slots to be shown in the Hong Kong market. The company has also

engaged local celebrities as spokespersons and issued discount coupons and gift

cards to customers.

Bonjour in-house brand advertisement Bonjour in-house brand advertisement


In order to encourage customer loyalty and deliver value-added services to customers,

Bonjour has launched a membership program. The Bonjour Master Card was jointly

launched by the group and Dah Sang Bank. Holders of the card are conditionally

granted certain welcome gifts and are able to enjoy discounts on all merchandise as

well as benefits when using Bonjour beauty and health salon services.

To bolster its loyalty program and encourage return visits, Bonjour has launched a

bonus reward program to reward members with cash coupons or sales discounts.

These marketing and promotional strategies have already had some success in

attracting return visits in addition to having a positive effect on the company’s

corporate image and goodwill.

Solid earnings growth ahead

For the retail business, we project sales growth of 22%, 20% and 18% in FY11F-13F,

respectively, helped by stable same-store sales growth and 11-16 new store openings

per annum in Hong Kong, Macau and China in the three years. We estimate

same-store sales growth for Hong Kong and Macau to remain 7-9% YoY in

FY11F-13F. Meanwhile, we expect beauty service revenue growth to be 16-17% in

FY11F-13F, respectively, contributing 11% to total sales.

For the company as a whole, we forecast SG&A expenses at 32% of sales, with rental

expense representing 11-12% of total sales and staff costs 14%. A&P expenses

should be maintained at 3% of total sales for FY11F-13F.

Overall, the company’s net profit is projected to rise 23% in FY11F, and 22% in FY12F

and FY13F. We see low downside risk to our earnings projections as we have

relatively conservative store rollout and margin growth forecasts for Bonjour.


29

Key assumptions

Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F

Total sales 1,382 1,705 2,121 2,573 3,087 3,627

Sales of merchandise 1,173 1,508 1,886 2,300 2,770 3,257

Service income of beauty treatment services 195 183 221 256 297 347

Commission income 15 15 15 17 20 23

Sales (YoY %) 14 23 24 21 20 18

Sales of merchandise 9 29 25 22 20 18

Service income of beauty treatment services 64 (6) 21 16 16 17

Commission income (1) 1 1 16 13 15

Sales breakdown (%)

Sales of merchandise 85 88 89 89 90 90

Service income of beauty treatment services 14 11 10 10 10 10

Commission income 1 1 1 1 1 1

Retail sales by region 1,173 1,508 1,886 2,300 2,770 3,257

Hong Kong & Macau 1,173 1,508 1,880 2,250 2,619 3,007

China NA NA 6 50 151 249

Retail sales by region YoY (%)

Hong Kong & Macau 9 29 25 20 16 15

China N/A N/A N/A 740 200 65

No. of retail stores

Hong Kong 26 33 39 44 49 54

Macau 1 1 1 2 2 2

China 0 0 1 6 14 25

HK JV 1 0 NA NA NA NA

Total 28 34 41 52 65 81

Net additions of stores (4) 6 7 11 13 16

Hong Kong (4) 7 6 5 5 5

Macau 0 0 0 1 0 0

China 0 0 1 5 8 11

HK JV 0 (1) N/A N/A N/A N/A

No. of beauty salons 16 17 19 22 26 30

Hong Kong 14 15 16 17 19 21

Macau 1 1 1 1 1 1

China 1 1 2 4 6 8

Net additions of beauty salons 6 1 2 3 4 4

SSSG for retail business (%) 8 19 10 9 8 7

GPM for retail business (%) 39.1 34.3 36.2 37.2 38.2 39.2

YoY (ppt) 1.7 (4.8) 1.9 1.0 1.0 1.0

GMP for beauty service business (%) 91.1 90.6 91.8 92.8 93.8 94.8

YoY (ppt) 1.3 (0.6) 1.2 1.0 1.0 1.0

Group’s gross profit margin (%) 47.0 40.8 42.4 43.1 43.9 44.9

YoY (ppt) 3.8 (6.2) 1.6 0.7 0.8 1.0

Rental expense 161 183 226 282 348 416

Rental expense as % of sales 11.6 10.7 10.7 11.0 11.3 11.5

Staff expense 218 248 289 355 430 512

Staff expense as % of sales 15.8 14.5 13.6 13.8 13.9 14.1

Distribution expense 35 45 60 77 99 123

Distribution expense as % of sales 2.6 2.6 2.8 3.0 3.2 3.4



30

Initiate with Outperform and target price of HK$1.60

Based on our EPS estimates of HK$0.10 in FY12F, Bonjour’s shares are now trading

at 14x FY12F PER versus an average FY12F PER of 15x for the Hong Kong retailers.

We believe the stock deserves to trade at a higher PE multiple to Hong Kong retailers,

especially when one-third of its sales was driven by mainland consumers. Moreover,

with superior ROAE, we suggest a higher valuation for Bonjour.

We set our target price at 16x FY12F, implying a PE/G ratio of 0.7x applied to

Bonjour’s three-year EPS CAGR of 23% and 24% re-rating upside from the current

share price.

Attractive dividend yield

Bonjour sits on a hefty cash position of over HK$200m in net cash. Its sound financials

with projected ROE of 100% in FY11F should support the company’s attractiveness.

Management has committed to a dividend payout of 80% of recurring earnings in

FY11-13F in view of the company’s strong cash position. Even factoring in slower

sales growth, we still expect Bonjour to offer an attractive dividend yield in the Hong

Kong retail sector. We forecast dividend yield of 5-7% for FY11-13F, one of the highest

within the consumer sector.

Bonjour’s 12-month forward rolling yield

3.4%

3.9%

4.4%

4.9%

5.4%

5.9%

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

Source: Bloomberg, Bonjour, CCBIS estimates


31

Profit and loss projections


Revenue 1,382 1,705 2,121 2,573 3,087 3,627

Retail business 1,173 1,508 1,886 2,300 2,770 3,257

Beauty service business 209 198 236 273 316 370 Revenue YoY (%) 14 23 24 21 20 18

Retail business 9 29 25 22 20 18

Beauty service business 57 (6) 19 16 16 17 COGS (733) (1,009) (1,222) (1,464) (1,731) (1,999) Gross profit 649 696 899 1,109 1,355 1,628

YoY (%) 24 7 29 23 22 20 Gross margin (%) 47.0 40.8 42.4 43.1 43.9 44.9 Other income – sub-total 12 13 13 13 14 14 Rental expense 161 183 226 282 348 416

YoY (%) (2) 14 24 24 24 19

As % of sales 11.6 10.7 10.7 11.0 11.3 11.5 Staff expense 218 248 289 355 430 512

YoY (%) 18 14 17 23 21 19

As % of sales 15.8 14.5 13.6 13.8 13.9 14.1 Distribution expense 35 45 60 77 99 123

YoY (%) 5 27 33 30 28 25

As % of sales 2.6 2.6 2.8 3.0 3.2 3.4 Other SG&A 98 93 117 124 144 166

YoY (%) 28 (5) 26 6 16 15

As % of sales 7.1 5.5 5.5 4.8 4.7 4.6

Total SG&A 512 569 692 839 1,021 1,217

YoY (%) 14 11 22 21 22 19

As % of sales 37.0 33.3 32.6 32.6 33.1 33.6 Other gains – net 12 13 13 13 14 14 EBIT 159 154 230 284 348 424

YoY (%) 85 (3) 50 23 22 22 EBIT margin (%) 11.5 9.0 10.9 11.0 11.3 11.7 Depreciation and amortization 19 22 29 39 42 44

YoY (%) (3) 17 33 34 6 6 EBITDA 178 176 260 324 390 469

YoY (%) 70 (1) 48 24 20 20

EBITDA margin (%) 12.9 10.3 12.3 12.6 12.6 12.9 Interest income 1 0 0 0 0 0

Interest expense 0 1 1 1 1 1 Profit before tax 159 154 229 283 347 424

YoY (%) 87 (4) 49 24 22 22

PBT margin 11.5 9.0 10.8 11.0 11.2 11.7 Income tax (27) (25) (38) (48) (59) (72)

Effective tax rate (%) 16.9 16.5 16.5 17.0 17.0 17.0 Net profit 133 128 191 235 288 352

YoY (%) 87 (4) 49 23 22 22

Net margin (%) 9.7 7.5 9.0 9.1 9.3 9.7 EPS (HK$) 0.049 0.047 0.066 0.081 0.100 0.122

YoY (%) 93 (4) 40 23 22 22

DPS (HK$) 0.036 0.058 0.057 0.065 0.080 0.097



32

Balance sheet projections


Property, plant and equipment 39 52 68 76 81 85

Prepaid land lease payments 2 0 0 0 0 0

Goodwill 0 0 0 0 0 0

Investment in an associate 4 0 0 0 0 0

Rental and utility deposits 30 42 63 88 109 131

Held-to-maturity investments 0 3 0 0 0 0

Deferred tax assets 4 3 2 2 3 4

Non-current assets – total 78 101 133 166 193 220

Inventories 131 170 204 243 286 330

Trade receivables 19 26 45 54 65 76

Rental and utility deposits 18 16 21 30 38 45

Prepayments, deposits and other receivables 16 26 27 33 40 47

Held-to-maturity investments 0 0 3 3 3 3

Due from an associate 4 0 0 0 0 0

Current tax assets 0 19 21 20 20 20

Pledged bank balances 0 1 1 1 1 1

Bank and cash balances 159 212 256 295 352 427

Current assets – total 348 471 580 680 805 950

Trade payables 111 122 146 176 208 240

Other payables, deposits received and accrued charges 51 63 80 95 113 130

Deferred revenue 29 156 170 206 247 290

Current portion of long-term bank borrowings 0 3 3 3 3 3

Short-term bank borrowings 0 15 20 18 15 13

Trade finance loans 25 40 55 55 55 55

Bank overdrafts 0 0 0 0 0 0

Finance lease payables 1 1 1 1 1 2

Current tax liabilities 30 17 24 30 37 45

Current liabilities – total 247 418 498 584 678 778

Long-term bank borrowings 0 3 0 0 0 0

Finance lease payables 2 2 1 1 1 1

Long service payment liabilities 1 1 2 2 3 3

Non-current liabilities – total 3.05 5.71 2.52 2.70 3.20 3.70

Equity 176 149 212 260 317 389

Total assets 426 572 713 847 999 1,170

Total liabilities and equities 426 572 713 847 999 1,170

Net debt (cash) (134) (151) (178) (219) (279) (357)

Net gearing (%) Net cash Net cash Net cash Net cash Net cash Net cash



33

Cashflow projections


EBIT 159 154 230 284 348 424

D&A 19 22 29 39 42 44

EBITDA 178 176 260 324 390 469

Operating cash flow before changes in working capital 356 352 520 647 779 937

Working capital changes:

Inventories (11) (39) (34) (39) (43) (44)

Trade and other receivables (8) (13) (20) (15) (17) (18)

Rental and utility deposits (5) (11) (26) (34) (28) (29)

Trade and other payables 13 10 24 30 32 32

Other payables 8 16 17 15 17 17

Deferred revenue (7) 43 14 36 41 43

Total working capital changes (10) 8 (25) (7) 2 1

Interest received 1 0 0 0 0 0

Interest paid (1) (1) (1) (1) (1) (1)

Tax paid (4) (44) (33) (41) (53) (64)

Operating cash flow 342 315 460 598 727 873

Total capex (23) (33) (46) (47) (47) (48)

Free cash flow 318 282 414 552 681 825

Other investing cashflow (0) (1) (0) 0 0 0

Proceeds from issue of shares 4 8 110 0 0 0

Repurchase of shares (25) (7) (42) 0 0 0

Dividends paid to owners of the company (98) (98) (206) (188) (231) (280)

Other financing cashflow 5 35 15 (2) (3) (2)

Net cash flow 205 220 292 362 446 544


Key financial metrics


ROAE (%) 81 79 106 100 100 100

ROAA (%) 34 26 30 30 31 32

ROIC (%) 53 41 49 52 54 58

Average inventory days 66 62 61 61 60 60

Average receivable days 5 6 8 8 8 8

Average payable days 55 44 44 44 44 44

Cash conversion cycle (days) 15 23 25 24 24 24


Gross gearing (%) 0 12 9 7 5 3



34

Bonjour’s brand portfolio

Private labels Products with exclusive distribution rights

Source: Bonjour

Source: Bonjour

Products from parallel imports Products from Hong Kong sole agents

Source: Bonjour

Source: Bonjour

Top-ten private label and exclusive brands

1. Suisse Reborn Private label

2. Yumei Private label

3. Dr. Schafter Private label

4. Franck Olivier Exclusive

5. Rote Fabrik Private label

6. Forget Me Not Private label

7. I. Color Private label

8. RevitaLash Exclusive

9. Swiss 3 Private label

10. Nature’s Green Private label

Source: Bonjour


35

Bonjour’s management biography and shareholding structure

Executive directors

� Dr. Ip Chen Heng, Wilson, 52, the founder, chairman, CEO and executive

director of the group. He founded the business with his wife, Ms. Chung Pui

Wan, in June 1991 and has 32 years of experience running retail and service

businesses. Dr. Ip has solid experience in retail and wholesale businesses and

is responsible for the overall strategic planning and formulation of corporate

policy of the group.

� Ms. Chung Pui Wan, 49, vice chairman and executive director. Ms. Chung, the

spouse of Dr. Ip Chen Heng, has more than 27 years of experience in sales and

marketing of cosmetics products. Before the group was founded in 1991,

Ms. Chung had worked for several cosmetics companies in the sale and

marketing of branded cosmetics products for over five years. With her sales

promotion techniques and deep product knowledge in cosmetics, Ms. Chung

has made a significant contribution to the group’s product innovation and

marketing strategy. She is responsible for the overall management of sales and

marketing operations.

� Mr. Chan Chi Chau, 47, executive director. He joined the group in June 2002

and has 17 years of experience in the field of cosmetics retailing and wholesale

management. Mr. Chan is responsible for planning and supervising the

implementation of the electronics point-of-sales system. He also assists the

chairman in formulating policy and strategy development for the group.

Senior management

� Mr. Kwong Chun Chung, 42, financial controller and company secretary. Mr.

Kwong joined the group in 2006 and has over 17 years of experience in auditing,

accounting and financial control.

� Ms. Ha Kwok Chu, Rosina, 52, president. She is responsible for the

management of the group’s beauty service. Ms. Ha joined the group in 2001

and has 27 years of experience in the beauty industry. She was appointed as

one of the Beauty Industry Training Advisory Committees by ITACs or

Education and Manpower Bureau in 2006.

� Mr. Tsui Mang Wai, Eric, 44, information technology manager. Mr. Tsui has

more than 20 years of experience in software development and system

management. He is responsible for the EPOS system and overseeing the

operation of the computer system. He joined the group in July 2002.


36

Shareholding structure

Ip Chun Heng, Wilson Public

Bonjour Holdings Limited

(653 HK)

35.19%64.81%

Source: Bloomberg, HKEx


37

Sa Sa International (178 HK)

A beautiful franchise Company Rating:

Outperform (initiation)

Sa Sa is one of Hong Kong’s pioneering cosmetics superstores,

enjoying strong recognition from both local and mainland

customers who have come to appreciate its large basket of

international and self-owned brands. Sa Sa has a major

advantage in terms of scale as it competes with other retailers to

accommodate the growing appetite for quality cosmetics.

� Formidable leading position. Sa Sa has over 70 outlets in

Hong Kong and Macau, with plans to expand by 30 stores

by FY13F (year to end-March), bringing the total to 100

stores. The company also boasts an extensive overseas

network covering major cities throughout Southeast Asia.

� Private labels gaining prominence. Sa Sa’s self-owned

brands and focused marketing have led to a better sales

mix and higher gross profits – welcome news as the

company needs these ramparts to protect it from the

onslaught of landlords intent on raising the rent on its

various stores.

� Long-term potential in China. Management reiterated its

enthusiasm for China and will continue to expand its

network there. It expects to stem the losses of recent years

and achieve breakeven by FY13F.

� Attractive dividend yield. Another strong case for

investment is the company’s high yet sustainable (rich war

chest) dividend yield of over 4% for FY11-13F.

� Good to keep. While Sa Sa’s loss-making China business

is still a cloud over the stock price, other markets,

especially its core market Hong Kong, are expected to

deliver stellar growth. High earnings quality and dividend

yield also appeal. We initiate with Outperform and a target

price of HK$5.45 based on 0.9x PE/G or 21x CY12F PE.

Financial forecast

Year to 31 Mar 2009 2010 2011F 2012F 2013F

Revenue (HK m) 3,609 4,111 4,761 5,481 6,257

Revenue (YoY, %) 12 14 16 15 14

Core net profit (HK m) 314 383 485 609 744

Core net profit (YoY, %) 15 22 27 26 22

Core EPS (HK$) 0.114 0.138 0.173 0.217 0.265

Core EPS (YoY, %) 15 21 26 26 22

PER (x) 40.5 33.4 26.6 21.2 17.3

Yield (%) 2.5 3.0 3.7 4.8 5.9

FCF yield (%) 2.0 2.6 4.0 4.4 5.4

ROAE (%) 28 33 39 46 52

Net gearing (%) Net cash Net cash Net cash Net cash Net cash

Source: Sa Sa data, CCBIS estimates

Price: HK$4.61

Target: HK$5.45

(initiation)

Trading data

52-week range HK$2.43–5.98

Market capitalization (m) HK$13,462/US$1,727

Shares outstanding (m) 2,805

Free float (%) 34

3M average daily T/O (m share) 7.6

3M average daily T/O (US$m) 4.2

Expected return (%) – 1 year 23

Closing price on 28 April 2011

Stock price and HSI

2.5

3.0

3.5

4.0

4.5

5.0

5.5

28-Apr-10 28-Jun-10 28-Aug-10 28-Oct-10 28-Dec-10 28-Feb-11 28-Apr-11

HK$

Sa Sa HSI

Source: Bloomberg

Claudia Ching (852) 2532 2528 [email protected] Timon Tai (852) 2532 2574 [email protected] Forrest Chan, CFA (852) 2532 6743 [email protected]


38

Cosmetics superstore

With over 33 years of operation, Sa Sa is a leading cosmetics specialist retailer in Asia

with regional operations and a network encompassing over 177 stores in Hong Kong,

Macau, China, Singapore, Malaysia and Taiwan.

The company engages in retail and brand management for over 100 global skincare

and cosmetics brands exclusively; and sells over 400 brands and 15,000 products.

Founded in 1978, the brand has built a good reputation among Asian customers.

Based on Euromonitor estimates, Sa Sa operations accounted for a 44% share of

Hong Kong’s cosmetics and skincare market in 2009.

Besides “Sa Sa” branded stores, the group operates mono-brand stores for its

self-owned “La Colline” and “Suisse Programme” brands. The company has obtained

sole agent/distributor status for some core global cosmetics brands, such as the

prestigious global brand, Elizabeth Arden, which appointed Sa Sa as its sole agent in

Hong Kong and Macau in October 2002.

An innovative business model to drive its success

Sa Sa’s efficient and not easily duplicated sourcing model ensures its status as an

industry powerhouse. Its sourcing mix comprises: parallel trade (26% of sales), private

labels/exclusive products (40% of sales) and local agents (34% of sales). Few

cosmetics operators have the capability of adopting a similar business model;

moreover Sa Sa is the most scalable operation among peers. The diversified

distribution model gives Sa Sa a distinct advantage over peers in price, product mix,

and ability to extend client coverage. In regard to the latter, we identify the following

specific advantages.

� While Hong Kong single-store operators or small-scale local cosmetics stores

can only sell parallel trade products as they lack capital and access to brand

agents, Sa Sa offers a more comprehensive variety of brands thanks to its close

relationships with international brand agents.

� Upscale department stores such as Sogo and Lane Crawford mainly source

products through local agents or overseas private brands, which focus on

mid-to-high end labels at relatively high prices. Parallel products are not

available in these stores, making product assortment in department stores

relatively restricted compared with Sa Sa.

� Sa Sa’s private labels and exclusive products are not sold outside of Sa Sa

stores. As Sa Sa’s products have widespread and growing recognition from

customers, they function as an inducement, luring customers to Sa Sa’s doors.

These customers know that Sa Sa stores are the only place they can find

Sa Sa’s exclusive products.

Sales breakdown from products in 1HFY11

Sourcing Sales contribution (%)

Private label 15

Exclusive products 25

Products sourced from local suppliers 34

Parallel trade 26

Source: Sa Sa

Innovative cosmetics retailing at

competitive prices in Asia

Sa Sa’s market leadership

reflects a global purchasing

strategy and a retailing formula

based on choice and

convenience


39

Self-owned brands gain weight in the market

Sa Sa owns seven brands, all developed and manufactured by cosmetics

manufacturers abroad. This category accounted for 40% of the group’s total sales in

1HFY11, up from 38% in FY10. Average gross margin was over 80%.

Sa Sa in-house brands portfolio

Source: Sa Sa

Sa Sa acts as the sole agent/distributor for more than 100 international brands, for

which it is responsible for brand building, marketing, sales and distribution. Sa Sa

purchases products from these brand names at wholesale prices and then resells

them to customers at a mark-up.

Sa Sa’s in-house brands have begun to see handsome returns. The success of these

brands has encouraged the company to continue to develop its own products. Sales

from in-house products rose 24% YoY in 1HFY11 and we expect strong growth

momentum going forward, given that recently launched exclusive products have

earned good word-of-mouth and repeat purchases.

Serving ladies from across Asia

Sa Sa owns the most extensive network among Hong Kong-based cosmetics retailers

with shops covering Hong Kong, Macau, China, Taiwan, Malaysia and Singapore. The

company’s widely-recognized brand name is key to its development and expansion

into overseas markets.

In-house brands are gaining

popularity

Wide exposure to overseas

market


40

Sales breakdown by region or business segment in

1HFY11

YoY sales growth by region or business segment in

1HFY11

China

3%

Taiwan

4%

Singapore

4%

Malaysia

5%

Sasa.com

7%

Hong Kong &

Macau

77%

18%

42%

13%

24%

27%

22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Hong Kong &

Macau

China Taiwan Singapore Malaysia Sasa.com

Source: Sa Sa Source: Sa Sa

Hong Kong and Macau sustaining steady growth

Hong Kong and Macau remain Sa Sa’s primary markets, contributing approximately

77% of total sales or HK$1.6b in 1HFY11. Sa Sa was operating 74 retail stores or

cosmetics counters in 1HFY11, one-third located in prime tourist areas. We estimate

its store count in Hong Kong and Macau will grow to 81 stores by FY11F.

Number of Sa Sa stores in Hong Kong in FY08-13F

62

81

90

100

70

58

16%

13%

9%

11%11%

7%

0

10

20

30

40

50

60

70

80

90

100

110

2008 2009 2010 2011F 2012F 2013F

6.5%

8.5%

10.5%

12.5%

14.5%

16.5%

No. of stores (LHS) YoY (RHS)

Source: Sa Sa, CCBIS estimates

Hong Kong and Macau remain

Sa Sa’s core contributors


41

Major drivers of the Hong Kong business:

� A variety of cosmetics offerings, easy access to its shops and the one-stop

shopping store format will draw traffic to Sa Sa. It also helps that consumer

sentiment is still high, sustained by Hong Kong’s healthy economic

environment.

� With 50% of its Hong Kong sales deriving from mainland visitors, Sa Sa is more

leveraged to these big spenders than most other local cosmetics retailers.

Greater numbers of mainland tourists will raise Sa Sa's average transaction

value. Average spending per ticket reached HK$600 in the first two months of

2011. Riding on the rapid economic development in China, mainland visitor

spending power is anticipated to further strengthen and support Sa Sa’s sales

growth.

We estimate FY11F same-store sales to surge 8% YoY and expect FY11F to register

16% YoY sales growth.

Total sales and same-store sales growth in Hong Kong and Macau in FY08-13F

3,288

3,795

4,371

5,008

2,981

2,643

14.6%15.2%

15.4%

10.3%12.8%

18.7%

6.3%6.8%

7.6%7.1%

4.5%

12.8%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

2008 2009 2010 2011F 2012F 2013F

HK$m

4%

6%

8%

10%

12%

14%

16%

18%

20%

Sales (LHS) YoY (RHS) SSSG (RHS)


Investing for the future, patience needed for China

Sa Sa began its China operations in 2002 despite several obstacles, including the

unresolved cumbersome product registration issue, which resulted in an insufficient

number of SKUs carried in its stores.

Sa Sa currently has 19 conventional outlets and 19 beauty counters under its

self-owned brand “Suisse Programme” in China, mainly in tier-one and tier-two cities.

These accounted for 3% of total sales in 1HFY11.


42

Retail outlets within the mainland China market

3

2

2

1

21

1

2

5

2

1 2

10

1

1

18

1 1

1

1

Chengdu

Changsha

Yichang

Wuhan

Hangzhou

Nanjing

Shaoxing

Ningbo

Shanghai

Suzhou

Qingdao

Tianjin

Beijing

Shenyang

Anshan

“Sa Sa” store

Suisse Programme counters

Upcoming new stores

Source: Sa Sa, CCBIS

Although Sa Sa’s China operation is still loss-making, the situation has improved. The

company went from a HK$10.9m loss in 1HFY10 to a HK$10.7m loss in 1HFY11. The

operation has already reached breakeven at the operating level while losses were

mainly from warehouse and office expenses. At the same time, demand for quality

cosmetics in China is still high, evidenced by the 41% YoY sales surged in 1HFY11.

Sa Sa is currently focusing on store productivity in China. It has committed to add

resources, with one team designated for store openings and a separate team for store

operations. Sa Sa’s business plan in China revolves around the following strategies:

� Network expansion. Management will accelerate the expansion of its retail

network in China, seeking sites with high traffic. The group separated its retail

shops into two regional markets – northern and eastern China – and assigned

separate management teams to supervise their daily operation. In order to

manage its outlets more effectively, Sa Sa plans to open additional stores in

existing cities to increase market penetration or enter into new cities within the

existing focus markets.

From a long-term point of view, management is planning to add three more

focus markets with the target to directly own 100 stores by 2013.

Narrowing losses from China


43

Number of stores in China in FY08-13F

4

10

17

32

45

58

12

23

1821

2428

0

13

26

39

52

65

2008 2009 2010 2011F 2012F 2013F

No. of stores No. of counters


� Improve product offerings. This strategy, aligned with Hong Kong’s strategy,

involves placing more emphasis on growing the private label brand business to

achieve better margins. At the conventional Sa Sa stores, a more selective

approach will be adopted in terms of product inclusion. This will hopefully

shorten the product registration process. Management will also fine-tune its

product mix to accommodate different climates, cultures, customer spending

patterns and market trends in different cities.

� Adjust store mix. To match customer shopping habits in different regions,

management’s future strategy is to increase single-brand stores/beauty

counters within department stores under its exclusive brands – Suisse

Programme, Methode Swiss and Sa Sa – in northern China and roll out

standalone stores in southern China.

Sa Sa will scale down each store to 2,000 sq ft on average in order to enhance

operating efficiency and to maintain a tighter grip over headcount and rental

expenses. Staff and rental costs account for approximately 14-18% of sales.

� Shop productivity improvement. Management has noticed that high customer

service quality is essential to improving sales growth. Hence the company will

continue to enhance staff training and increase retention rates to lift overall

service standards. Management will also implement standardized pricing

policies, procedures and logistic systems to enhance the scalability of the

business.

We believe the new initiatives listed above are positive for Sa Sa’s long-term

development in China. Management does not expect to break even anytime before

FY13F as the operation needs critical mass and scale to cover total fixed costs.

Continuing losses from its China business will remain a major overhang for Sa Sa, and

there is no guarantee it will achieve profit breakeven by its own schedule, an outcome

that could lead to additional losses. That said, we anticipate losses in China will

narrow over time and sales will grow 57% YoY in FY11F and 36% YoY in FY12F.

Business expected to be

profitable by FY13F


44

Sales for China in FY08-13F

115.5

60.6

97.0

151.9

207.2

247.857%

31%36% 20%

(48)%

60%

0

30

60

90

120

150

180

210

240

270

2008 2009 2010 2011F 2012F 2013F

HK$m

(50)%

(40)%

(30)%

(20)%

(10)%

0%

10%

20%

30%

40%

50%

60%

70%

Sales (LHS) YoY (RHS)


Healthy improvement in overseas markets

Other businesses and geographic markets, including Singapore, Malaysia and Taiwan,

accounted for 12% of the total sales in 1HFY11 and reported improvement in turnover

and profitability.

Singapore: Massive investment in new retail space in the country that began in 2009

will continue to contribute to network expansion and market penetration opportunities

for Sa Sa. We look for steady sales growth of 24% on the back of 7% SSSG and 17%

YoY growth in net store openings in FY11F.

Malaysia: The Malaysian business continues to leverage on Sa Sa’s growing market

status and strong brand equity to achieve sales growth. Management targets adding

eight stores in FY11F and we forecast 19% sales growth for the market in FY11F.

Taiwan: Taiwan market growth is relatively sluggish compared with the Malaysia and

Singapore markets, with sales increases of only 9% YoY in 1HFY11. We believe the

gradual resurgence of Taiwan’s economy and the development of an individual visit

scheme for mainland tourists to Taiwan will bring more traffic to Sa Sa’s stores.

Overseas market store numbers in FY08-13F

14 1315

1922

25

13 14

1821

2427

21

26

30

38

45

52

0

10

20

30

40

50

60

2008 2009 2010 2011F 2012F 2013F

Taiwan Singapore Malaysia


Maintaining sound sales growth

in overseas business


45

Overseas market sales in FY08-13F

131 132147

163174

188

135 140

162

201

237

273

104

142

176

209

238

272

0

50

100

150

200

250

300

2008 2009 2010 2011F 2012F 2013F

Taiwan Singapore Malaysia


Challenges for e-commerce

Sa Sa’s e-commerce revenue saw growth of 22% YoY in 1HFY11. It has increased its

contribution to total group sales to 7% in 1HFY11. However, we expect growth from

e-commerce to slow due to government policy and inadequate logistic support. More

specifically:

� The Chinese government lowered the custom duty exemption limit in

September 2010, which has had a detrimental effect on online sales. New

custom regulations require adjustments to Sa Sa’s online strategy and resource

allocation.

� The new warehouse was initially unable to handle the quantity of orders given

the breadth of products on offer. As a result, 3QFY11 sales deliveries were

severely affected.

Management normalized warehouse operations and efficiency has greatly improved.

Sa Sa has set aside a team to expand the local online business in China and

co-operates closely with high-traffic online portals, e.g. Taobao, to distribute its

products.

Given the adjustments being made, we anticipate online sales growth to be flat in

FY11F. However, we expect a gradual increase in online business in the coming years,

given the rising popularity of online shopping and the adjusted marketing strategy.

Gross margin enhancement through increased private label distribution

Thanks to the rebalanced product offering, sales contributions from exclusive

products continued to rise in 1HFY11 to 40% of the group’s retail business from 32%

the year before. Driven by successful new brands and product launches, sales growth

of in-house brand products experienced strong growth of 24% YoY in 1HFY11. In light

of improving market conditions, the company intends to expand its own brand’s share

within its sales mix.

Change in government custom

duty and logistical problems

represent hurdles for Sa Sa’s

online business

Rising GPM, supported by

increased contribution from

higher margin in-house labels


46

Gross margin for Sa Sa products

Sourcing Gross profit margin (%)

Private label 80

Exclusive products 65 – 70

Products sourced from local suppliers 35 – 40

Parallel trade 10 – 15

Source: Sa Sa

At the group level, we estimate gross margin expansion of 0.9ppt in FY11F, followed

by 1.0ppt in FY12F and 1.1ppt in FY13F. The ultimate goal of the company is to

increase the contribution from exclusive products to 50% of sales. This implies gross

margin of 50% for the group by FY16F.

Gross profit margin trends in FY08-13F

43.1%

43.7%

44.1%

45.0%

46.0%

47.1%

43%

44%

45%

46%

47%

48%

2008 2009 2010 2011F 2012F 2013F


Prudent cost control measures

Rental cost. Partly on account of its well-known brand name, Sa Sa has considerable

bargaining power with landlords and in many cases is invited to be an anchor tenant

with favorable rental rates. Sa Sa also has a great deal of flexibility to relocate its

stores given its established clientele.

Currently, one-third of the stores are located in tourist areas. Management is planning

to increase shop openings in non-tourist areas in light of rising rental pressure.

One-third of Sa Sa’s outlets are up for renewal every year and management estimates

an average rental hike by 19% for leases being renewed in FY11F, an estimate that

seems low compared to peers, in our view. We believe management is able to control

rental costs within 11% of total sales in FY11F-13F.

Staff cost. Staff cost in the retail business accounts for approximately 14% of total

retail sales. We expect staff cost to maintain at the reasonable level of 14% of total

sales in FY11-13F, since frontline salesladies’ compensation is largely turnover-based.

Advertising and promotion cost. Sa Sa has paid for several celebrity sponsorships

in Hong Kong as well as organized joint promotions and partnerships with local

suppliers and international beauty brands. Despite the large amount of advertising

activity conducted by Sa Sa, advertising and promotion costs were well contained

within 2% of total sales for the group in FY11-13F.

Major costs remain

well-controlled


47

Key assumptions

Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F

Sales by region 3,221 3,609 4,111 4,761 5,481 6,257

Hong Kong & Macau 2,643 2,981 3,288 3,795 4,371 5,008

China 116 61 97 152 207 248

Taiwan 131 132 147 163 174 188

Singapore 135 140 162 201 237 273

Malaysia 104 142 176 209 238 272

Sasa.com 93 154 241 241 253 268

Revenue (YoY, %) 20 12 14 16 15 14

Hong Kong & Macau 19 13 10 15 15 15

China 31 (48) 60 57 36 20

Taiwan 9 0 12 11 7 8

Singapore 10 4 16 24 17 15

Malaysia 65 36 24 19 14 14

Sasa.com 63 66 57 0 5 6

Sales breakdown by region and business segment (%)

Hong Kong & Macau 82 83 80 80 80 80

China 4 2 2 3 4 4

Taiwan 4 4 4 3 3 3

Singapore 4 4 4 4 4 4

Malaysia 3 4 4 4 4 4

Sasa.com 3 4 6 5 5 4 Number of stores 110 125 150 191 226 262

Hong Kong and Macau 58 62 70 81 90 100

China 4 10 17 32 45 58

Taiwan 14 13 15 19 22 25

Singapore 13 14 18 21 24 27

Malaysia 21 26 30 38 45 52 Net additions of stores 14 15 25 41 35 36


China (1) 6 7 15 13 13

Taiwan 3 (1) 2 4 3 3


Malaysia 7 5 4 8 7 7 Number of counters 14 25 21 25 28 32


China 12 23 18 21 24 28

Taiwan 0 0 0 1 1 1


Malaysia 0 0 0 0 0 0

Same-store sales growth (%)

Hong Kong & Macau 13 5 7 8 7 6

Taiwan (9) (3) 9 3 3 5

Singapore (1) (2) (2) 7 6 6

Malaysia 17 14 10 5 6 8 Gross profit margin (%) 43.1 43.7 44.1 45.0 46.0 47.1

YoY (ppt) 0.6 0.5 0.9 1.0 1.1 Rental expense 338 350 397 472 555 641

Rental expense as % of sales 11 10 10 10 11 11

Staff expense 566 493 555 649 753 873

Staff expense as % of sales 18 14 13 14 14 14

A&P expense 67 69 83 93 108 124

A&P expense as % of sales 2 2 2 2 2 2



48

Decent earnings outlook

Growing scale and growing contribution from private labels should drive gross margin

expansion and sustain sales growth. We expect the company to achieve a 25% EPS

CAGR in FY10-13F, based on a 15% CAGR in sales growth. Other costs are

expected to remain well contained given Sa Sa’s stringent cost measures. With such

a strong growth profile and projected margin enhancement, we believe Sa Sa

deserves to trade at a premium to peers, supported by its market leadership,

extensive network across Asia, high-quality operations and seasoned management.

Trading at dividend yield premium to peers

Sa Sa has a dividend payout ratio of up to 100% for FY07-09, implying a dividend

yield of 3-4% on average at the current price. Sa Sa’s dividend yield is relatively high

compared to the sector. Supported by the rich cash position of over HK$600m, we

expect over 90% dividend payout in the next three years, indicating dividend yield of

4-7% for FY11-13F. We believe that Sa Sa is one of the most attractive picks for

investors to park their capital.

Sa Sa’s 12-month forward rolling yield

3.4%

3.9%

4.4%

4.9%

5.4%

5.9%

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

Source: Bloomberg, Sa Sa, CCBIS estimates

Initiate with Outperform rating and target price of HK$5.45

Sa Sa has undergone a mild de-rating over the past few months on worries over the

removal of import tax restrictions as well as the general de-rating of retail stocks. We

believe the potential for a further de-rating is minimal given the compelling dividend

payout and attractive ROE compared with peers. These factors should support

Sa Sa’s share price. Our target CY12F PE of 21x is conservative and based on an

earnings CAGR of 25% of 0.9x PE/G.

We estimate over 90% dividend

payout in FY11-13F


49

Group profit and loss


Revenue 3,221 3,609 4,111 4,761 5,481 6,257

Hong Kong, Macau and China 2,759 3,042 3,385 3,947 4,578 5,256

Taiwan 131 132 147 163 174 188

Singapore 135 140 162 201 237 273

Malaysia 104 142 176 209 238 272

Sasa.com 93 154 241 241 253 268

Revenue (YoY, %) 20 12 14 16 15 14

Hong Kong, Macau and China 19 13 11 17 16 15

Taiwan 31 (48) 12 11 7 8

Singapore 9 0 16 24 17 15

Malaysia 10 4 24 19 14 14

Sasa.com 65 36 57 – 5 6

COGS (1,832) (2,032) (2,296) (2,617) (2,957) (3,308)

Gross profit 1,389 1,577 1,815 2,145 2,523 2,950

YoY (%) 22 13 15 18 18 17

Gross margin (%) 43.1% 43.7% 44.1% 45.0% 46.0% 47.1%

Other gains/losses 20 26 26 30 34 37

Rental expense 338 350 397 472 555 641

YoY (%) 18 4 13 19 17 16

As % of retail sales 10.8 10.1 10.3 10.5 10.6 10.7

Staff expense 566 493 555 649 753 873

YoY (%) 17 (13) 13 17 16 16

As % of sales 17.6 13.7 13.5 13.6 13.7 14.0

Advertising and promotional expense 67 69 83 93 108 124

YoY (%) 47 4 19 13 16 15

As % of sales 2.1 1.9 2.0 2.0 2.0 2.0

Other SG&A expense 119 322 347 376 408 449

YoY (%) 18 13 19 5 5 5

As % of sales 3.7 8.9 8.4 7.9 7.4 7.2

Total SG&A expense 1,090 1,235 1,381 1,590 1,824 2,088

YoY (%) 17 13 12 15 15 15

As % of sales 33.8 34.2 33.6 33.4 33.3 33.4

EBIT 320 372 457 585 734 899

YoY (%) 31 16 23 28 25 22

EBIT margin (%) 9.9 10.3 11.1 12.3 13.4 14.4

Depreciation and amortization 66 64 62 71 72 74

YoY (%) (16) (2) (3) 14 2 2

(to be continued)


50

Group profit and loss (continued)


EBITDA 385 436 519 656 806 973

YoY (%) 19 13 19 26 23 21

EBITDA margin (%) 12.0 12.1 12.6 13.8 14.7 15.5

Interest income 25 13 6 6 9 9

Profit before tax 420 383 465 591 742 908

YoY (%) 54 (9) 21 27 26 22

PBT margin (%) 13.0 10.6 11.3 12.4 13.5 14.5

Income tax (71.3) (67.4) (83.8) (106.4) (133.6) (163.4)

Effective tax rate (%) 17.0 17.6 18.0 18.0 18.0 18.0

Net profit 348 316 381 485 609 744

YoY (%) 57 (9) 21 27 26 22

Net margin (%) 3.2 3.9 4.3 4.4 4.3 4.4

Exceptional 76 2 (2) – – –

Normalized net profit 272 314 383 485 609 744

YoY (%) 36 15 22 27 26 22

Normalized net margin (%) 8.5 8.7 9.3 10.2 11.1 11.9

EPS (HK$) 0.126 0.114 0.137 0.173 0.217 0.265

YoY (9) 20 26 26 22

Core EPS (HK$) 0.099 0.114 0.138 0.173 0.217 0.265

YoY 15 21 26 26 22

DPS (HK$) 0.105 0.115 0.140 0.170 0.220 0.270



51

Balance sheet projections


Property, plant & equipment 150 115 134 139 145 151

Investment securities 0 0 0 0 0 0

Other assets 73 105 135 135 135 135

Non-current assets – total 222 219 268 273 279 285

Inventories 471 469 563 595 681 770

Trade receivables 28 25 39 39 45 51

Investment securities 0 0 0 0 0 0

Cash and bank 652 620 646 783 827 920

Other current assets 70 81 66 66 66 66

Current assets – total 1,221 1,196 1,314 1,483 1,618 1,807

Trade and bill payables 178 144 176 215 243 272

Other payables 114 111 156 179 203 227

Tax payable 33 22 35 53 67 82

Short-term loan 0 0 0 0 0 0

Receipts in advance 0 0 0 0 0 0

Current liabilities – total 325 278 368 448 512 580

Long-term loan 0 0 0 0 0 0

Receipts in advance 0 0 0 0 0 0

Other non-current liabilities 10 15 19 19 19 19

Minority interest 0 0 0 0 0 0

Non-current liabilities – total 10 15 19 19 19 19

Equity 1,108 1,123 1,196 1,290 1,366 1,494

Total assets 1,443 1,415 1,582 1,757 1,897 2,092

Total liabilities and equities 1,443 1,415 1,582 1,757 1,897 2,092

Net debt (cash) (642) (606) (628) (764) (808) (901)




52

Cashflow projections

Year to March (HK$m) 2008 2009 2010 2011F 2012F 2013F

EBIT 320 372 457 585 734 899

D&A (66) (64) (62) (71) (72) (74)

EBITDA 385 436 519 656 806 973

Operating cash flow before changes in working capital 640 743 914 1,170 1,468 1,798

Working capital changes:

Inventories (87) 2 (94) (32) (86) (90)

Trade and other receivables 3 3 (13) (1) (6) (6)

Trade and other payables 57 (34) 31 39 28 29

Other payables 22 (3) 45 23 23 24

Total working capital changes (5) (32) (31) 30 (40) (43)

Interest received 25 13 6 6 9 9

Interest paid 0 0 0 0 0 0

Tax paid (64) (78) (70) (89) (120) (149)

Operating cash flow 328 334 415 597 646 781

Total capex (59) (75) (74) (76) (78) (80)

Free cash flow after CAPEX 269 259 341 521 568 701

Other investing cashflow (208) 201 (213) 6 9 9

Proceeds from issue of shares 17 4 27 0 0 0

Dividend paid (234) (290) (360) (390) (533) (617)

Other financing cashflow 0 0 0 0 0 0

Net cash flow (155) 174 (206) 137 44 93


Key financial metrics


ROAE (%) 26 28 33 39 46 52

ROAA (%) 19 22 26 29 33 37

ROIC (%) 140 99 101 108 150 176

Average inventory days 85 84 82 83 84 85

Average receivable days 3 3 3 3 3 3

Average payable days 30 29 25 30 30 30

Cash conversion cycle (days) 59 58 59 56 57 58


Gross gearing (%) 0 0 0 0 0 0



53

In-house brands

Source: Sa Sa


54

Sa Sa’s management biography and shareholding structure

Executive directors

� Dr. Kwok Siu Ming, Simon, 57, co-founder, chairman and CEO of Sa Sa

International. Dr. Kwok has expanded Sa Sa’s footprint from one outlet in 1978

to an expansive network across many countries in Asia. Dr. Kwok is a

committee member of the Chinese People’s Political Consultative Conference

of Hubei Province, honorary life president and a councilor of the Cosmetics &

Perfumery Association of Hong Kong, honorary president of the Federation of

Beauty Industry (Hong Kong), vice-chairman of the Quality Tourism Services

Association Governing Council, honorary founding president of the Professional

Validation Center of the Hong Kong Business Sector, and honorary life

president of the Hong Kong Brands Protection Alliance. Dr. Kwok was awarded

the “Owner-Operator Award” at the DHL/SCMP Hong Kong Business Awards

2007.

� Dr. Kwok Law Kwai Chun, Eleanor, 56, founder of the group and a member of

the executive committee, compensation committee, nomination committee and

risk management committee. Dr. Kwok has more than 34 years of experience in

the sale and marketing of beauty products. With extensive professional

knowledge and many years of experience in cosmetics retailing, she pioneered

the unique operational concept of open-shelf displays of beauty products.

Dr. Kwok plays a leading role in the marketing, operations, human resources

and staff training functions of the group. She is currently the honorary president

of the Cosmetics & Perfumery Association of Hong Kong, an executive

committee member of the Guangdong Women’s Federation, honorary president

of the Hong Kong Federation of Women and a member of the HKFW

Entrepreneurs Committee.

� Mr. Look, Guy, 53, CFO and executive director of the group. Mr. Look assumed

the role of CFO in March 2002 and has accumulated over 28 years of

experience in local and overseas financial and general management. He has

previously served as the CFO and an executive director of Tom.com Limited. In

2009, Mr. Look became an independent non-executive director of Cafe de Coral

Holdings Limited. He holds a Bacehlor’s Degree in Commerce from the

University of Birmingham, England, membership with the Institute of Chartered

Accountants in England and Wales and with the Hong Kong Institute of Certified

Public Accountants.

Senior management

� Mr. Law Kin Ming, Peter, 54, was appointed senior vice-president, category

management & product development in January 2008. Mr. Law is the

brother-in-law of Dr. Kwok Siu Ming Simon. He has over 26 years experience in

the field of sales and marketing, 19 of which were in senior management

positions. He has a Bachelor’s Degree in Arts majoring in Communications

Studies from the University of Windsor, Ontario, Canada and is pursuing a

Bachelor’s Degree in Commerce.

� Ms Loi Wei Sin, Corina, 53, was appointed as the senior vice president/country

head of Malaysia since 2008. Ms. Loi has more than 27 years marketing and

retail experience encompassing everything from health food products to high

fashion. Ms. Loi was also an initial member of the Malaysian operation.


55

Shareholding structure

Kwok Siu Ming Public Shareholder

Sa Sa International Holdings Ltd.

(178 HK)

34.35%65.65%

Source: Bloomberg, HKEx


Rating definitions

Outperform (O) – expected return 10% over the next twelve months

Neutral (N) – expected return between -10% to 10% over the next twelve months

Underperform (U) – expected return < -10% over the next twelve months

Analyst Certification:

The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities

or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report;

and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations

made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong

Securities and Futures Commission) has dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of the report; (ii)

neither they nor their respective associate(s) serves as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective

associate(s) has any financial interests in the securities covered in this report.

Disclaimers:

This report is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly owned subsidiary of CCB International (Holdings) Limited

(“CCBIH”) and China Construction Bank Corporation (“CCB”). Information herein has been obtained from sources believed to be reliable but CCB International Securities

Limited, its affiliates and/or subsidiaries (collectively “CCBIS”) do not warrant its completeness or accuracy or appropriateness for any purpose or any person whatsoever.

Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Investment involves risk and past performance is

not indicative of future results. Information in this report is not intended to constitute or be construed as legal, financial, business, tax or any professional advice for any

prospective investors and should not be relied upon in that regard. This report is for informational purposes only and should not be treated as an offer or solicitation for the

purchase or sale of any products, investments, securities, trading strategies or financial instruments of any kind. Neither CCBIS nor any other persons accept any liability

whatsoever for any loss arising from any use of this report or its contents or otherwise arising in connection therewith. Securities, financial instruments or strategies

mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account prospective investors circumstances, objectives,

or needs and are not intended as recommendations of particular securities, financial instruments or strategies to any prospective investors. The recipients of this report

shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report.

Readers are cautioned that actual results may differ materially from those set forth in any forward-looking statements herein. While all reasonable care has been taken to

ensure that the facts stated herein are accurate and that the forward-looking statements, opinions and expectations contained herein are based on fair and reasonable

assumptions, CCBIS has not been able to verify independently such facts or assumptions and CCBIS shall not be liable for the accuracy, completeness or correctness

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adequacy of the information contained in this report and make such independent investigation as they may consider necessary or appropriate for such purpose. Recipients

should seek independent legal, financial, business and/or tax advice if they have any doubt about the contents of this report and satisfy themselves prior to making any

investment decision that such investment is in line with their own investment objectives and horizons.

The recipients should be aware that CCBIS may do business with the issuer(s) of the securities covered in this report or may hold interest in such securities for itself and/or

on behalf of its clients from time to time. As a result, investors should be aware that CCBIS may have a conflict of interest that could affect the objectivity of this report and

CCBIS will not assume any responsibility in respect thereof. Where applicable and required, any relationship CCBIS may have with the issuers(s) of the securities or

interests in such stocks(s) will be disclosed in this section of the report. The information contained herein may differ or be contrary to opinions expressed by other

associates of CCBIS or other members of the CCBIH group of companies.

This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all

jurisdictions or to certain categories of investors. This report is not directed at you if CCBIS is prohibited or restricted by any legislation or regulation in any jurisdiction from

making it available to you. You should satisfy yourself before reading it that CCBIS is permitted to provide research material concerning investments to you under relevant

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cannot otherwise be distributed or transmitted, whether directly or indirectly, into the US or to any US person. This report also cannot be distributed or transmitted, whether

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and Taiwan).

Any unauthorized redistribution by any means to any persons, in whole or in part of this research report is strictly prohibited and CCBIS accepts no liability whatsoever for

the actions of third parties in distributing this research report.

Copyright 2011 CCBIS. The signs, logos and insignia used in this research report and company name “CCB International Securities Limited” are the

trademarks of CCB and/or CCBIS. All rights are hereby reserved.

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cosmetic retailer sector 28 apr 2011 c ching

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